Labor Market in the United States: Developments in Q1 2024

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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.

The creation of new jobs remains particularly robust in the United States, also thanks to the migratory flow that has arrived in the country in recent months. However, as seen in Figure 4, survey-based data, typically predictive, show that in the coming months, both in the manufacturing sector and the service sector, entrepreneurs expect a contraction of their workforce.

Powell recently noted that wage growth should be considered in conjunction with worker productivity data. Indeed, wage increases would be justified and not necessarily inflationary if accompanied by an improvement in productivity and thus output offered. As shown in Figure 5, wage growth has accelerated in recent years and in Q1 2024 remains substantially above the pre-pandemic trend at 4.19% YoY. However, productivity (measured by output per hour worked) has also grown and, although it has stalled in Q1 2024, remains above the pre-pandemic trend. Indeed, the labor cost per unit produced has dropped significantly in recent months and has now returned to the level of 2020, thus easing inflationary pressures.

The labor market, which in the immediate post-pandemic period recorded a significant imbalance between demand and supply, thus creating pressures on wages and consumer price growth, is evidently now in a phase of rebalancing and no longer appears as strong. Moreover, recent gains in productivity justify wage growth, and do not necessarily render it inflationary.