The Labor Market Is Still Historically Tight

Summary & Key Takeaways

  • With wage growth still strong and unemployment low, the labour market is still historically tight. For now.

  • This will continue to pressure policy makers to remain hawkish and likely lead to a policy error, not for the first time.

  • Looking forward, the leading indicators of unemployment suggest we are likely to see a material rise later this year, while the leading indicators of wage growth suggest a deceleration is also likely.

  • This will have significant implications for inflation, whilst also allowing a dovish Fed pivot, eventually.

In case you’d forgotten, the labour market is still historically tight

Despite being a lagging economic indicator, understanding the outlook for both employment and wage growth is important for all investors as the flow on effects from these trends are considerable. In particular, the movements in employment and wage growth have significant influence on the monetary policy decision making process of J-Powell and his associates at the Fed, which itself is a significant driver of both the liquidity and growth cycles, and thus asset prices.

As it stands, the dynamics within the labour market are not representative of recessionary conditions nor are they at levels that beget easy monetary policy. This is true of both the unemployment rate and wage growth.

Despite all the talk of recession, which may be true, the labour market is still historically tight. The gap between job openings and the number of unemployed persons remains far beyond any level seen in decades. Although openings appear to be normalising at long last, the number of unemployed persons is yet to show any sign of the impending economic slowdown.