The Federal Reserve has talked a lot about its goal of a soft landing for the economy as it raises interest rates to fight inflation, but there hasn't been as much talk about what that would look like for workers.
Fed Chairman Jerome Powell has called the labor market “tight to an unhealthy level,” with demand outpacing supply. Restoring balance is going to require not just more people entering the labor market, but more “involuntary churn.” That means more workers being laid off, and, hopefully, a labor market that’s still strong enough to reabsorb them quickly.
The good news on the supply front is that over the past six months, thanks to both a stronger job market and learning to live with Covid-19, Americans have been going back to work. From November 2020 through October 2021, the US labor force increased by only 800,000 people. But over the past six months it’s grown by 2.4 million. More people working should help relieve labor shortages and are one reason the Federal Reserve believes the economy is becoming more balanced.
But the Fed wants to see somewhat lower labor demand as well, and for workers that’s the trickier part. Perhaps because of overstaffing in the retail industry and signs of cutbacks in pockets of the tech industry, layoffs have been rising since March. From a low of 166,000 in the week ended March 19, initial jobless claims have risen to 218,000 in the most recent week, the highest level since January.
Is this a sign of a looming recession or part of the rebalancing story that will lead to a soft landing? That’s where continuing jobless claims — the number of people who haven’t yet found a job and are still filing for unemployment benefits — are sending a more optimistic message. Since that same week ended March 19, the level of continuing claims has fallen by almost 200,000 people. So while more people are being laid off every week now than two months ago, there are fewer people on unemployment now than there were then as more people return to work.
When labor demand wasn’t this high — basically any time in the past 20 years — tracking the state of the job market and what it meant for monetary policy was easy. “More jobs” was good, “more layoffs” was bad. But now, since the Fed has told us that the labor market is out of balance and needs to soften at least a little, the analysis is more nuanced. Rising initial jobless claims don’t necessarily mean the level of unemployment is rising, just that there’s more churn happening among employers.
Here's what a soft landing in the labor market should look like:
Thanks to more people joining the labor force, the level of employment continues to grow, but the unemployment rate stops shrinking (or if it falls, the decline must be very gradual). Jobless claims rise somewhat as companies cut back, but not too much, and the number of job openings falls at a modest pace.
Continuing jobless claims stabilize, indicating a stable labor market that’s neither overheating nor unraveling. The number of people unemployed between five and 14 weeks, which is in the monthly jobs report, is also stable, suggesting that whoever is laid off is able to find another job quickly.
Wage growth stabilizes at a rate below 5%, and preferably closer to 4%, which in a more benign inflation environment is a level that would allow workers to see inflation-adjusted raises with enough room for companies to grow profit through productivity or efficiencies.
This is a lot to process, and the different dynamic will take some time getting used to as economic and employment growth slow in the months ahead. But it’s a core piece of what policy makers, investors and workers should be watching to judge how this economic adjustment is going. Of course, even the most careful attempt at rebalancing can turn into something nastier than policy makers were hoping. But so far, the labor market is lining up with the Fed’s goal for a soft landing.