Conditions in the labor market affect the economy in two main ways. Whether the labor market is running hot or cold affects the Federal Reserve’s decisions on how best to deliver on its mandate of price stability and maximum employment. And the size of the labor force is critical to the outlook for growth and much else besides.
The first issue is the crux of monetary policy: It preoccupies investors and analysts. The second is less discussed, more important and now more worrying.
To start with the short term, Federal Reserve Chair Jerome Powell says that the labor market has lately been in “a curious kind of balance,” with low rates of both hiring and firing. The result is persistently low unemployment despite tepid demand for labor. Facing those conditions, the central bank has concluded that, for the time being, interest rates are roughly where they should be. Given all the shocks and stresses assailing the economy, this judgment is debatable. For the longer term, though, what matters more is the trend of economic growth — which depends on how quickly the labor force is expanding.
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