Labor Market in the United States: Developments in Q1 2024

By Martina Daga, macro economist at AcomeA SGR S.p.A., the Milan-based investment manager.

The Federal Reserve's focus on balancing wage growth with productivity gains is aiding in labor market rebalancing, reducing inflationary pressures while maintaining strong job creation. Click here to read this blog in Italian.

The Federal Reserve's mandate is twofold: (i) consumer price stability and (ii) maximum employment. In this context, the balance of the labor market is particularly relevant not only for the latter part of the mandate relating to maximum employment but also for the part concerning consumer price stability. Indeed, as Figure 1 shows, wage growth, measured by the Employment Cost Index—which is the Fed's preferred wage growth indicator—is closely linked to the Supercore inflation indicator (i.e., the core consumer service prices excluding residential services). The prices of consumer services are, in fact, particularly sensitive to wage dynamics.

In the early months of this year, the trend of rebalancing between labor demand and supply has continued. Figure 2 shows that the number of new job openings per unemployed person in the United States has declined from the peak of two units reached at the end of 2022 and is now aiming towards a single unit. A high number of job openings per unemployed person indicates that labor demand exceeds supply, thus giving workers greater bargaining power in wage negotiations and making employers willing to pay more per employee, given the relative scarcity. The rebalancing trend shown in Figure 2 is particularly favorable for the Fed not only because of the lower inflationary pressures that should accompany it, but also because the number of new job openings still exceeds the number of unemployed, so for the moment there are no high risks of a sudden increase in the unemployment rate. Indeed, Figure 3 clearly shows that the rate of voluntary layoffs, typically associated with a certain security on the part of workers in their ability to find another job and a wage increase, is declining and has recently dropped slightly below the pre-pandemic level.

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