U.S job market recovering as inflation worsens

A new report from Reuters suggests that the U.S labour market is gaining steam and momentum as new figures from the U.S Labour Department claim that unemployment benefits fell last week to the lowest level in 15 months.

Throughout the pandemic, the American economy has suffered from high unemployment rates with rates reaching a record high of 14.7% in April 2020 as the COVID-19 induced lockdown has ravaged certain sectors of the American economy especially in low skill industries with high labour supplies such as hospitality and retail.

These industries have been particularly hurt by the pandemic as the lockdown caused a cyclical loss of demand for these sectors.

This cyclical loss of demand is somewhat attributed to changing consumer fashions and habits as the lockdown induced by the COVID-19 pandemic has forced consumers to switch to online shopping as an alternative.

Consequently, local cash-based hospitality and retail businesses are at an inherent disadvantage due to their small size as they do not have the infrastructure necessary to provide online deliveries, as a result of this, they have seen a loss of demand.

A good majority of these firms are local and cash-based businesses, meaning that a cyclical loss of demand particularly hurts these firms as the lack of cash inflows can very quickly cause the business to run out of cash as smaller businesses typically have smaller reserves.

However, due to a successful vaccination rollout in recent months in America, these industries are beginning to pick up steam again as consumers with piled-up lockdown savings are eager to go out and spend in local areas.

As a result of this firms which have survived the COVID-19 pandemic have seen a surge in demand for their goods and services, consequently, a rise in demand increases prices which then leads to rationing.

These rising prices are evidenced by the very recent increasing U.S inflation rate which in May has reached 5.0% CPI, the biggest year on year increase since August 2008.

Rising price levels incentivise producers to produce increase supply. Producers are then signalled to increase their factor inputs such as labour which is particularly abundant in low skill industries.

So, because of the price mechanism, local firms within the hospitality industry have seen increased business activity through hiring additional workers to meet the new wave of demand, consequently, employment within the U.S is rising as the labour market begins to recover.

This concept is not exclusive to the hospitality industry however as rising price levels within an economy mean that all producers are seeing rising prices, consequently, the majority of firms should be looking towards scaling their factor inputs or perhaps changing their production to cater towards the most profitable goods and services, if possible.

As a result of this, the American economy should begin to produce more goods and services as fewer resources, such as labour, are being wasted, meaning that as the American economy moves closer to productive efficiency, the supply of goods and services within the economy also rises.

Consequently, rising supply yields a fall in the rate at which price levels rise, however, this may not be the case.

The increase in productive efficiency is due to increasing employment. This means that, although the American economy will be producing more, it will also be demanding more as newly employed or re-employed workers spend their newly earned disposable incomes on goods and services.

This will lead to demand-pull inflation as the short-run relationship between unemployment and inflation is realised.

This relationship may lead to worsening inflation in the coming months for the American economy which is already a problem as the CPI inflation rate is at 5.0%, well above the 2.0% target.

However, the American Federal Reserve has stated to not worry, illustrating that this increase in inflation is not an issue as it is unlikely it will persist in the long term as a more productively efficient economy produces more capital goods, meaning that in the long term, once these capital goods are completed, the productive capacity of the economy rises.


Written by Hubert Kucharski


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