Home / News / World /  US labor market may remain tight over the next one year. Here's why
Back

US labor market may remain tight over the next one year. Here's why

The November non-farm payroll recorded the lowest job gain since April last year.  (AFP)Premium
The November non-farm payroll recorded the lowest job gain since April last year. (AFP)

  • SBI's economist note said, fighting inflation will require an increase in the unemployment rate and a decline in vacancies. However, this looks difficult as higher vacancies in the US labor market are a by-product of inadequate skill matching over which the Fed has little control.

One of the largest economies, the United States currently faces a contradictory situation between the number of job vacancies and the unemployment rate. There are too many job vacancies, while the unemployment rate is at a slower pace --- creating a wide gap between the two. In the fight for bringing inflation down, there is a need for an increase in the unemployment rate which looks difficult in the current scenario, and thereby the US Federal Reserve is likely to continue to hike key funds rate ahead.

According to Dr Soumya Kanti Ghosh, Group Chief Economic Adviser at the State Bank of India (SBI), as of October 2022, there is a wide gap between the job vacancy rate (currently at 6.3%) and unemployment rate (currently at 3.7%) in the US currently indicates a strong labor market (also vindicated by significantly high quit rates).

Ghosh's note said, fighting inflation will require an increase in the unemployment rate and a decline in vacancies. However, this looks difficult as higher vacancies in the US labor market are a by-product of inadequate skill matching over which the Fed has little control.

In October, US inflation witnessed a better-than-expected slow down to 7.7% compared to the market expectation of 8%. Also, core inflation came in at 0.4% against the expectation of 0.6%.

"There was a good reason to believe that US inflation has shown signs of peaking and it is coming under control till the US NFP data released on Dec 2 and showed US Non-Farm payrolls was 263K in November against the expectation of 200K, and 284K in October," SBI economist's note added.

The November non-farm payroll recorded the lowest job gain since April last year. The reason behind the downside in non-farm payroll would be missing men from the US labor force, as per SBI's report.

The US Council of Economic Advisers report revealed that out of 83% of people in the prime working age of 25-54 (at Feb 2020 level), who are currently not in the labor force this year were also not in the labor force a year before, implying around 10 million people are missing from the workforce.

The reason behind the missing men is the weak labor demand for non-college-educated and less skilled workers post-pandemic. That being said, lesser people are entering into private sector jobs due to a lack of safety nets and are in search of public sector jobs. However, there is no increase in public sector job vacancies -- which makes missing men and women to not be able to join public sector jobs out of compulsion and private sector jobs out of choice.

On the other hand, the latest data revealed that November wages expanded by 5.1% on a y-o-y basis with a sequential increase of 0.6%, fastest since Jan’2022.

In such a case, this is, thus, likely to translate into continued higher nominal wages. Ghosh's note added, "This in turn might create a wage-price spiral. Hence a moderation in commodity prices may not be enough to halt rising inflation and we might end up in a situation of slow growth and high inflation."

Further, SBI's note added, low unemployment and high job vacancy rate may continue to define the US Labour market and the Fed will thus continue to hike rates.

In its note, Ghosh added, "…. Fed may have to pursue rate hike cycles though of smaller magnitudes….. as reflected in increasing wages, stagnant unemployment rate, and increasing job openings…rate cycle getting longer and might stretch beyond February 2023…."

SBI's economist has predicted the expected duration of the current regime (i.e., the average time it spends in a given regime) for both the US unemployment rate and job vacancy. As per the estimate, the current regime of low unemployment will last for another 21 months from Sep-22. While in the case of the job vacancy rate -- the current scenario will last for another 26 months from September 2022.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout
x