Unemployment: The Unemployment Rate Is Rising, Indicative of a Tightening Labor Market
- Unemployment has slowly drifted away from optimal levels due to elevated interest rates.
- Leverage has shifted toward employers, which are not expanding headcount anymore.
- Reductions in job openings and hiring will make the labor market less accessible to a growing pool of unemployed workers.
After reaching historic highs during the coronavirus recession, unemployment continued to trend near an optimal level of 3.5% despite increased labor cost pressures. The labor market’s resilience was attributable to increased labor market churn—meaning workers were changing jobs at a high rate—and also to labor hoarding—meaning employers were seeking to maintain headcount via increased benefits and other compensatory incentives. Yet prolonged pressure from labor costs has finally returned leverage to employers, which are now reducing or maintaining headcount. With reductions in new job openings and hiring, the labor market is becoming more exclusive to those on the outside; it will only improve once labor costs recede through further moderation within both inflation and interest rates.