US labour market recovers from high unemployment caused by Covid-19

Last month in the US, records show that there was job growth of 431,000 as people are increasingly able to return to their old jobs or find a new jobs, following the worldwide pandemic of the last few years.

These figures, from the Labour Department, mark the 15th consecutive month of job growth for the US. This increase helped to push the unemployment rate down to 3.6%, from its previous 3.8%.

This now places the US employment rate towards the lower bound of their 3-5% naturally occurring rate, which sounds great as people are finally able to find work. However, it simultaneously indicates that the US economy is approaching full capacity in terms of its labour market, which is extremely tight (hence the lowest value of their unemployment rate being constantly around the 3% mark).

Furthermore, in January of 2022, the annual inflation rate of the US accelerated to 7.9%. This matched market expectations and is the highest it has ever been since January 1982. Energy prices remain the most significant contributor, with the prices of gasoline surging by 38%-40%.

With rising cost-push pressures (inflation caused by increased labour or raw material costs), the total supply of the US economy has decreased. This has resulted in a reduction of the economy’s output gap as demand-pull inflation (inflation caused by an excess or demand or supply) from the tight labour market, and high confidence has offset the loss in output.

With this increased confidence, bars, restaurants and hotels were among the businesses leading the hiring last month.

The US has now regained nearly all the jobs lost since the pandemic hit. And, due to the aforementioned tight labour market, firms have been forced to increase wages.

The Labour Department has revealed that the average weekly wage in March has increased by 5.6% from a year ago.

However, as most people have realised, those increases still continue to lag behind the rate of inflation increase.

The Department says that its top challenge at the moment is hiring, but the pay isn’t the only factor making it difficult to find employees. As lives and lifestyles have been shifted by the pandemic, many former employees have left the industry, and many potential recruits have been discouraged from moving to the city.

This, paired with increasing inflation rates, could lead to a wage-price spiral situation as higher inflation rates will force more Americans to take jobs to ensure that they can retain their standard of living, which in turn will yield a further labour market squeeze and more rising wages.

To prevent such a scenario, the US central bank raised interest rates last month, for the first time since 2018, in an effort to reduce demand and pull inflation rates.

Some analysts have said that the strong hiring rates last month will support policymakers’ views that the labour market is strong enough to handle rate rises. On the other hand, some economists have suggested that the Federal Reserve should proceed with caution, pointing to signs that the pay gains may be peaking.

Additionally, the labour force participation rate remains a percentage point lower than it was in February 2020, sitting at a percentage of 62.4% last month, which showcases that more people are available to hire.

Elise Gould, a senior economist at the left-leaning Economic Policy Institute in Washington, has commented on the matter, saying, “This temporary leverage that workers have had over the last few months, as they were a bit more scarce .... unfortunately I'm not sure that's going to last.”


Written by Jade Andrew

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