How inflation and interest rates are impacting today’s labor market

This January, the U.S. unemployment rate dropped to an almost unheard-of 3.4% as the economy grew by 517,000 jobs. Not only does this figure more than double the Dow Jones growth expectation of just 187,000 added jobs, but it also represents the lowest unemployment rate since 1969.

Further adding to this labor trend is the shrinking rate of workforce participation. In 2020, 63.3% of eligible working-age Americans participated in the workforce. Today, that number is 62.2% . Considering there are over 208 million working-age Americans in the U.S., that small decrease actually represents millions of nonparticipating workers. 

What does this mean for the U.S. economy?

The shrinking unemployment rate, and rising non-participation rate, impacts the economy in two major ways: By encouraging the Federal Reserve to continue raising interest rates to curb inflation, and by making recruiting even more difficult (and expensive) for talent-starved industries. 

In response to low unemployment and other concerning inflationary measures, the Federal Reserve has raised rates considerably over the past year. If the Federal Reserve continues pumping up rates, as they did again in March, banks will feel even more financial pressure, and the stock market will remain volatile. High interest rates are already threatening the stability of banks around the world, and investors and companies are acting with caution.

Meanwhile, the tighter the labor market becomes, the higher prices rise. A low unemployment rate forces companies to offer higher and higher wages and increasingly valuable benefits to attract talent. And while a higher wage is great for employees in the short-term, those labor costs are quickly passed into the price of goods and services— canceling out the employee’s financial gain and raising costs across the country. This overheats the economy, and contributes to painful inflation. 

While overall unemployment is low, the numbers vary widely by industry

Service-based jobs are bouncing back

According to the U.S. Bureau of Labor Statistics, service-led industries are growing faster than any other sector in the economy. In January alone, leisure and hospitality employers added 128,000 jobs. That’s the biggest gain of any industry in January. But we’re still far below pre-pandemic employment levels. Even with that gain, the leisure and hospitality industry is down almost 500,000 jobs since 2020. 

The professional and business services industry, which includes legal, accounting, veterinary, engineering, and other service-based jobs, is the overall fastest growing industry since 2020. As of January 2023, this sector has added 1.5 million jobs. 

Transportation jobs are growing quickly

Close behind professional and business services, the transportation and warehousing industry has added almost 955,000 since 2020. In January alone, 23,000 new jobs opened up. 

A boom in transportation trucking is largely behind this significant growth. There are more trucking jobs available today than in 2019, and warehouse jobs have grown by about 50% since before the pandemic. But all that growth comes at a cost— the transportation industry has one of the smallest unemployment rates in the economy, with just 2.4% of qualified workers currently without a job. Even if every single unemployed skilled worker took a job in the transportation and warehousing industry, about 30% of jobs in durable manufacturing would still be vacant. Like other fast-growing sectors, the increase in jobs is significantly outpacing the level of available skilled workers.  

Education and health services jobs are on the rise

In January, 105,000 jobs were added to the education and health services sector. Since 2020, that industry has grown by 361,000 jobs. This is partly due to the number of health sector jobs lost during the pandemic. In most recessions, the health industry is largely unaffected. But in 2020, as health concerns triggered a world-wide downturn, employment dropped by 8.2% from April 2019 to April 2020. 

Since 2020, this industry has sharply rebounded as healthcare organizations quickly added new jobs and the education sector returned to in-person teaching and development. 

How will the labor market shift in the months and years to come?

Inflation plays a major role in the future of the U.S. labor market. If inflation remains high and the Federal Reserve continues to raise rates, it’s likely that unemployment will increase soon. Not only does inflation hurt corporations’ growth and development budgets (decreasing the number of new jobs they add), it triggers layoffs that add more unattached workers to the economy.

Over the past few months, big technology companies like Microsoft, Google and Meta have already laid off over 150,000 workers in response to rising costs, shrinking demand and shifting strategies. And the tighter corporate profits become, the more layoffs we can expect to see. 

The labor market plays a huge role in the health and growth of the overall economy. That’s why every business, in every industry, should keep a close eye on the trends that shape it. 

Want more? In addition to taxes, accounting, bookkeeping and CFO services through its FinOps, Escalon’s Essential Business Services include PeopleOps (HR, benefits, recruiting and payroll) and Risk (business insurance). Talk to an expert today.

This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.

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