The current state of the US labor market
In this paper, Domash et al. evaluate the labor market tightness by exploring the relationship between four different slack indicators from the household survey and measures of wage inflation. Their slack indicators are: a) the U-3 unemployment rate (the most commonly reported rate of unemployment in the United States and represents the number of people actively seeking a job), b) the prime age employment ratio, c) the vacancy rate, and d) the quits rate. For the firm-side indicators, they estimate an equivalent unemployment rate by examining what unemployment rate is consistent with the current measures of the job vacancy rate and the quits rate. In December 2021, the predicted firm side unemployment rate was between 1.2 to 1.7 percent, compared to the actual unemployment rate of 3.9 percent. They then evaluate the relative efficacy of these two unemployment rates in predicting past wage inflation using pre-pandemic data, and find that their results indicate that the firm-side equivalent unemployment rate is likely the best predictor of wage inflation. This indicator currently suggests that the labor market is very tight.
Some economists believe that labor market tightness will be alleviated over the coming year by increases in labor supply. We present a cursory analysis of the employment shortfall, and conclude that even under optimistic Covid-19 outcomes, the majority of the employment shortfall will likely persist moving forward. Moreover, if employment were to increase due to an increase in labor force participation, it would be accompanied by increases in incomes, and therefore an increase in demand. We therefore conclude that any benefits from the supply-side over the next year are unlikely to substantially mitigate inflation pressures from the labor market.
How Tight are U.S. Labor Markets?
Authors: Alex Domash, Larry Summers
From: Harvard University
