Since March 2022, the Federal Reserve has increased its target interest rate from a range of 0.25-0.50 percent to 5.25-5.50 percent, the steepest rate increases in four decades. The purpose of the increases was to reduce inflation, which reached a peak of 9.1 percent on an annualized basis in June 2022. The expectation was that the Fed’s rate increases would come with an increase in the unemployment rate, which at the time was 3.5 percent. 

Indeed, the Phillips Curve has historically shown an inverse relationship between the rates of inflation and unemployment – a decrease in inflation is generally associated with an increase in unemployment.

That has not happened this time. Unemployment has remained at 3.5 percent while inflation has fallen to 3.2 percent. Optimism is growing that the Fed is going to be able to pull off what has been referred to as a “soft landing,” successfully reducing inflation without provoking a recession. Growth in the Gross Domestic Product in the second quarter of 2023 was at a solid annualized rate of 2.4 percent.

Why has unemployment not been higher? The short answer is that there are not enough workers to fill the jobs available. Even though the labor force participation rate for workers age 25-54 was at 83.4 percent in May 2023, the highest since 2007, there are still 1.6 job openings for every unemployed person*, a rate far in excess of the pre-COVID norm. 

*This rate is calculated by dividing the number of job openings (9.6 million) by the number of unemployed (5.947 million).

According to the U.S. Chamber of Commerce, a reduction in net immigration has substantially contributed to the inability to fill jobs. In 2016, the United States welcomed 1,236,000 more immigrants than people who left the country. That number dropped to 915,000 in 2019 and 376,000 in 2021, the latter being due in large part to the COVID-19 pandemic. Although the number of immigrants is estimated to have exceeded 1 million in 2022, the population of available immigrant workers is significantly lower than it has been in the past. 

The drop in immigrants is not an issue of demand. In 2022, there were 483,927 H-1B visa applications for just 85,000 spots, more than twice the ratio of just a few years earlier.

According to commentary and news reports, employees have responded by leaving for what they expect to be greener pastures. The number of employees who quit their jobs increased from 40.1 million in 2017-19 to 50.6 million in 2022. In part, employees have been chasing higher pay to keep up with inflation. In June of this year, for the first time since March 2021, the growth rate of workers’ wages exceeded inflation. At its peak in June 2022, the rate of inflation was almost 5 percent more than the rate of wage growth.

Although some industries have recently seen layoffs – the tech industry perhaps being the leader – there is also a belief that many employers are retaining excess employees during leaner times rather than laying them off and going through the costs and difficulties of trying to refill those positions in the future. 

It’s good news that inflation appears to largely be under control, but there is no clear or quick path to closing the mismatch between the number of job openings and the number of available workers. As a result, continued job turnover and upward pressure on wages seems likely.