… and may mean no recession
by Tenpao Lee, PhDDr. Lee is an economist and professor emeritus of economics at Niagara University.
Today’s news from the Bureau of Labor Statistics that the July unemployment rate was 3/5% may signal that the economy is in relatively good condition – and with the Fed’s interest rate hikes – that a recession is not imminent. With the addition of 528,00 jobs, a 3.5% rate is below the generally deemed healthy level of 4 to 6%, which, according to many economists, reflects a tight labor market contributing to higher wages and increased inflation.
But, the pandemic has changed everything, even what we once considered a “normal”unemployment rate. As a result, today’s 3.5% may not reflect a tight labor market. It may not mean higher wage levels in the near future.
During the height of the pandemic, many employees worked at home which enhanced labor supply and caused structural unemployment to decline. In the meantime, the other two types of unemployment, frictional unemployment and cyclical unemployment, also declined due to the development of information technologies and the influence of the global economy.
Therefore, a 3.5% unemployment rate may simply reflect the efficiency of the labor market and increased production leading to a higher GDP in the near future. That is, the aggregate supply curve would shift to the right with higher GDP and lower inflation.
A New Norm For Healthy Unemployment
The new norm for a healthy unemployment rate would then be 4% or lower. Moreover, before the pandemic, we did not have any noticeable inflation, even with the three rounds of QEs which stimulated aggregate demand significantly. The main reason was that aggregate supply expanded simultaneously and eased inflation pressure.
The pandemic which created supply disruptions, and the Ukraine war, which limited the world’s supplies of energy and agricultural products, were the main drivers of the inflation we’ve experienced in 2022. Their impacts are diminishing as COVID-19 has become a part of our lives and the war did not prevent the global economy from moving forward.
The Fed has made tremendous efforts to fight inflation from the demand side by raising interest rates. To have a soft landing, to contain inflation without recession, the labor market must be efficient. The current unemployment rate provides an optimal outlook for the economy.
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