The sluggish decline in inflation can be thought of as the result of price increases in the service sector being slow to fall. Services are a large part of modern economies and are heavily dominated by labour costs. This is one reason why there has been much focus recently on the behaviour of the US labour market.
Historically, the state of the labour market has been assessed by looking at the unemployment rate. However, it reacts with a long lag to changes in the supply and demand for labour and is therefore not always a good indicator. Furthermore, when the labour market is tight and the unemployment rate is low, it becomes insensitive to changes in labour market conditions. Thus, if the demand for labour rises, the unemployment rate will fall very little. Similarly, if the demand for labour falls, it will rise very little. Only as the demand for labour falls off meaningfully does the unemployment rate rise. This makes it unsuitable as an indicator at the current juncture.
For that reason, attention has increasingly focused on other measures of labour market tightness. The behaviour of job openings and quits have received a lot of attention.
The graph below shows the rates of job openings and quits together with the Federal Reserve Bank of Atlanta’s wage growth (over 12 months) tracker for the overall economy. Since the average levels of the series and their amplitude differ, the series have been normalised to have the same mean and amplitude.1
