The US Unemployment Struggle

At the end of 2021, the demand for workers in the US has remained high, which is a sign of the tightness in the labour market that has impacted economic recovery. Covid has resulted in many states having a high percentage of unemployment due to cyclical unemployment. This is because of the number of workers leaving their jobs throughout Covid, especially at the beginning due to lockdown.

Approximately 4.3 million Americans had quit their job in December, which are substantially high numbers, yet not as high as the previous month, November (at 4.5 million).

Labour is a form of derived demand and as the economy has started to open up again slowly this has been a struggle as demand has increased where workers have not. Leading to excess demand and loss of revenue for firms.

% in unemployment rates

As we can see, the % in unemployment rates during Covid has been relatively high. This has led to American businesses struggling with worker shortages, arising from factors such as skill mismatches, childcare responsibilities or public health guidelines.

The shortages of skilled workers can imply that the US economy is suffering from occupational immobility and that the US government may have to intervene and introduce some new supply-side policies to incentivise skilled workers to work again. However, this would just be an added cost to the US government's budget and it could be said that there's a high opportunity cost for introducing new supply-side policies as the money could be spent on sectors struggling more like healthcare or education.

Although some workers have even been capitalising on this seek for talent by quitting their jobs in the hope to find better or higher-paying roles. This increase in labour costs has also contributed to the rise in inflation and is a reason why the Federal Reserve has decided to wind down its stimulus programme more quickly.

As we can see from the graph, there has been a decrease in unemployment to 3.9% as the economy has added 150,000 jobs.

A mild contraction in the labour market was expected from January with “strong positive seasonal factors” which helps soften the effects of the newest wave of coronavirus, Omicron.

The US labour market is tighter than many others and looks set to stay that way for some time. Labour force participation in the US dropped further than in other advanced economies and remains depressed relative to them. So companies are fighting harder for workers, and unit labour costs are rising sharply compared with pre-Covid trend rates, while in other rich countries, those costs are declining. This could lead to even higher inflationary pressures to the US economy as workers’ disposable income would start to rise and therefore be able and willing to spend more. We can see this trend from the Phillips curve below as well.


Written by Rohan Dhir

Research compiled by Hugo Denage

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