Are US labour market tensions fading?

US labour markets are tight. Too tight in fact in the opinion of the Federal Open Market Committee (FOMC) that sets US monetary policy. This is clear from the minutes of the FOMC meeting that was held on 13-14 June, which signalled plenty of concerns about the state of US labour markets:

“ … some softening in labor market conditions would be needed to bring aggregate supply and aggregate demand into better balance and reduce inflationary pressures sufficiently to return inflation to 2 percent over time.”

However, the minutes go on to state:

“Nevertheless, they noted some signs that supply and demand in the labor market were coming into better balance …”

What are those signs and how strong are they? The minutes list a series of indicators signalling normalisation.

First, while the unemployment rate has been broadly unchanged in recent months, the number of vacancies posted has been declining. For instance, the vacancy rate fell from 6.4% in January 2023 to 5.9% in May 2023. With fewer vacancies to fill, firms are likely to raise wages to attract staff. Despite the decline, the vacancy rate remains high compared to pre-Covid levels with an average vacancy rate of 4.5% in 2019.

Chart 1. Vacancy and unemployment rate

Source: BLS and EFGAM calculations, data as of 12 July 2023.

The normalisation of US labour markets is apparent from the behaviour of the employment-to-population ratio and the labour force participation rate, both of which have been rising in recent quarters. Yet, at 60.3% and 62.6% they currently remain below their 2019 pre-Covid averages of 60.8% and 63.1%.

Chart 2. Labour force participation rate and employment-to-population ratio

Source: BLS and EFGAM calculations, data as of 12 July 2023

Further evidence of the normalisation of US labour markets is provided by the monthly change in non-farm payrolls, which has slowed gradually since early 2022 but which remain above the 2019 average.

Chart 3. Change in non-farm payrolls (thousands)

Source: BLS and EFGAM calculations, data as of 12 July 2023.

Similarly, hourly earnings growth, measured year-on-year, has declined from its 2022 high of 7% to 4.7%. When compared to pre-pandemic levels, hourly earnings growth is still elevated.

Chart 4. Hourly earnings (year-on-year)

Source: BLS and EFGAM calculations, data as of 12 July 2023.

Finally, average weekly hours worked have fallen in recent months to their 2019 average.

Chart 5. Average weekly hours

Source: BLS and EFGAM calculations, data as of 12 July 2023.

As these data show, there is substantial evidence that US labour markets are adjusting to the severe shocks they have faced in recent years. However, the adjustment process is painfully slow and there is a considerable distance to go before labour markets fully return to their pre-shock conditions.

Nevertheless, the tightening of monetary policy has influenced US labour markets in the expected way although perhaps not to the full extent expected by the Federal Reserve. As time passes, the continuation of this process will have implications for the outlook for US monetary policy.