The flood of workers has made the Fed’s job less painful. Can it last?

The flood of workers has made the Fed's job less painful.  Can it last?

Renting at hotels in New York’s Adirondack Mountains is getting easier this summer, partly because immigrants enter the country in larger numbers and provide a steady supply of seasonal help that was hard to come by right after the pandemic.

It’s making staffing less stressful for companies like Weekender, a brand that includes seven rustic hotels in and around the area. The company has managed to get six cultural exchange employees this summer, up from four last year. And similar stories are playing out across the country, presenting good news for the Federal Reserve.

Fed officials are trying to reduce inflation by raising interest rates and slowing the economy. A great deal of work depends on restoring equilibrium in the labor market, which requires 23 consecutive months There were significantly more jobs available than workers to fill them. Officials worry that if competition for labor remains fierce and wages continue to rise at the same rate, it will be difficult to completely stem the rapid price rise. Companies that are paying to lure workers will try to charge more to cover their rising labor bills.

The Fed may be helping cool the labor market by reducing demand, but the central bank is getting more help than expected from a rising supply of workers. In recent months, large numbers of workers have entered the labor market, surprising policy makers and many economists.

This growth is partly due to an uptick in immigration, which has come as the United States eased restrictions related to the pandemic, cleared processing backlogs and created more permissive policies. The labor supply has also been boosted as some demographic groups – including women in their prime working years – have returned to the job market in larger numbers than anticipated, pushing their employment rates to record highs.

That inflow has made the Fed’s job a little less painful. Hiring has been able to move at a solid pace, without further heating up the labor market workers are becoming available To replace those that are being removed. unemployment remains stable 3.5 percent, And some statistics even suggest that staffing is becoming less stressful. For example, wage growth has started to slow, and workers are slow no longer pulling such long hours.

John C. Williams, president of the Federal Reserve Bank of New York, said, “Monetary policy is part of the story of demand moving supply, but any help we can get from increasing supply is good news.” in an interview This month with The Financial Times.

Employers have added about 280,000 workers per month so far in 2023. Job gains are slowly slowing, but it is nearly three times the pace of 100,000 set by Fed Chairman Jerome H. Powell. He suggested that he hoped it would be necessary To provide employment to the ever increasing population.

The growing labor supply has allowed the Fed to accept hiring faster than expected without braking the economy even more aggressively. Fed officials, who have raised interest rates from near zero to more than 5 percent in March 2022, have raised them more slowly in recent months. Policymakers are expected to raise rates by a quarter point to a range of 5.25 to 5.5 percent at their meeting this week. Many investors are betting The decision, which will be announced on Wednesday, may Fed’s last move for now.

What the Fed does in the remainder of 2023 will depend on economic data. whether inflation, which has slowed down significantly from your peak In June 2022, will Medium continue? Are job gains and salary increases continuing to decline? If the economy maintains much momentum, the authorities may feel the need to take another step this year. If it cools off, they may feel comfortable holding off on rate hikes. In any case, policy makers are indicating that rates will probably need to be kept higher for some time.

When it comes to the labor market part of that puzzle, leading officials have indicated they think the next phase of restoring balance may be more difficult. Policy makers have welcomed the new labor supply in recent months, but some are skeptical that the trend may continue. Mr Williams suggested immigration may remain strong, but for participation – those working or looking to work – may find it difficult to climb much higher.

“I don’t think there’s much room to remain a major driver of the rebalancing of supply and demand — explaining that the Fed will need to continue using policy to slow labor demand to reduce inflation,” Mr. Williams said in his July interview.

Some economists and labor groups think officials like Mr. Williams are overly concerned about the prospects for a continued recovery in the labor supply: immigration numbers are still rising, and flexible and remote work arrangements could mean that people who couldn’t work in previous eras can now.

“While labor supply-side efficiencies will continue to improve, I think the Fed probably sold it short,” said Skanda Amarnath, executive director of Employ America, a research and advocacy group focused on the job market. “I think they’re probably still selling it for less.”

Workers began to become scarce in late 2020, after deep layoffs and immigration curbs reduced the size of the labor pool. civilian labor force – which includes people who are working or looking for work – declined by eight million people in early 2020.

But since then the supply of labor has increased by about 10.6 million people. This improvement is partly due to an increase in the foreign-born labor force, which accounts for nearly one out of every three potential workers. pandemic low pointBased on data from the Department of Labor.

Legal immigration is accelerating as processing backlogs clear and Biden administration policies allow more refugees In the country, said Julia Gelat, associate director of the US Immigration Policy Program at the Migration Policy Institute. Undocumented immigration has also been notable, fueled by political turmoil abroad and the relatively strong and stable US economy.

“We are seeing a huge increase in immigration,” Ms Geltt said. “Definitely a return to pre-Trump, pre-pandemic normalcy.”

Improvements to documented immigration are evident in visa data. An analysis by economist Courtney Shupert of Macropolicy Perspectives found that about 1.7 million workers could enter the country this year if current trends continue, about 950,000 more than the low point during the pandemic.

In fact, immigration may be even stronger than it was before the pandemic, when former President Donald J. Trump’s policies had reduced the number of foreigners entering the United States. They found that the number of potential workers coming into the country on visas in May alone was about 50,000 more than usual from 2017 to 2019.

Immigration is not the only potential source of new labor supply. Employment rates are climbing across the board, with a share of Handicap And women aged 25 to 54 Those at work reach new heights, possibly bolstered by the shift to more remote work and more flexible hours amid the pandemic.

“It has given us a supply of workers that we didn’t have before, because workplaces are more flexible,” said Diane Swonk, chief economist at KPMG.

The end result has been helpful to businesses like the Weekender Hotel in the Adirondacks. The company’s six cultural-exchange visa employees are spread across three of its seven properties, and are a small but important part of its 85-person workforce, said Keir Weimar, the company’s founder.

After a few years of optimization the company has generally found it easier to compete for employees. Mr. Weimar estimated that salaries have increased 10 to 15 percent over the past 15 months, but he said that wage growth is starting to slow down.

“We are now starting to define career-track progression more and link pay to performance and promotion rather than just to the market,” he added. “The salary pressure is definitely less than a year ago.”

Of course, the new labor supply can also outpace demand: As more people work, they earn money and spend it, counterbalancing any pressure on inflation, said Jason Furman, an economist at Harvard. This does not mean that reforming the labor supply is not helpful.

“It’s a way to get a higher pace of job growth without inflationary pressures,” he said.

But even as employers and economists embrace a slowly normalizing labor market, the supply of workers faces a major constraint: the aging population. America is fading as baby boomers, a large generation, are entering their retirement years, and older people are far less likely to be working.

This is why some Fed officials are skeptical that increasing the labor supply can provide much relief when it comes to rebalancing the labor market – a skepticism some economists share.

“I think we will still have a supply shortfall,” said Yelena Shulyatyeva, senior economist at BNP Paribas.

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