If you’re looking for a job, a labor market with many job openings and a low unemployment rate seems more ideal than one with few job openings and a high unemployment rate. But what seems ideal for a job seeker isn’t necessarily in the best interest of the economy as a whole.
Why is this the case?
When many employers need to fill many positions at the same time, they end up competing with each other for workers. To get workers, employers tend to raise wages, which is what has happened over the past few years as the economy recovers from the pandemic.
But it was a double-edged sword: With more money to spend, workers sent prices soaring, which prompted the Federal Reserve to raise interest rates to their highest levels in more than 20 years, making mortgages and other debt more expensive to pay.
But with more people looking for work (reflected in a higher unemployment rate), employers don’t have to raise wages as much, or at all, which could help keep inflation down because it means companies have less leverage to raise the prices of goods and services.
Friday’s jobs report showed that new hires fell to 206,000 last month from 218,000 in May and the unemployment rate rose to 4.1% from 4%, suggesting the labor market may be approaching “just right” conditions — not too hot and not too cold.
Federal Reserve officials said in their semi-annual report to Congress that the labor market looks “similar to the period immediately prior to the pandemic, when the labor market was relatively tight but not overheated.”
Meanwhile, David Russell, head of global market strategy at TradeStation, said he believes the labor market has already entered a “Goldilocks” state. “The labor market is flexing but not collapsing yet, which is supporting the argument for rate cuts,” he wrote in a Friday morning note.
“Things are not too hot, not too cold, it’s the right time and we’re getting close to September,” he added, referring to the Fed’s rate cut at the meeting.