The number of workers in the United States has continued to shrink as companies struggle to find employees for their openings.
“The hope for many to achieve a soft landing is that you meet in the middle, with demand cooling and labor supply picking up, and we reach a much healthier balance between the two,”[ads1]; said Michael Pugliese, economist at Wells Fargo. Wall Street Journal Sunday. “But if labor supply levels off or continues to fall, you’ll need to reduce demand even more to cool wage growth.”
According to Labor Department data, the number of workers in the United States has fallen by 400,000 since March, a troubling sign after the number of workers approached pre-pandemic levels earlier this year. The total labor force is now about 600,000 smaller than it was in early 2020, just before sweeping COVID-19 restrictions plunged the economy into recession.
The labor shortage has fueled fears that the economy will not achieve the “soft landing” many had hoped for as restrictions have been lifted, with some economists saying the imbalance between supply and demand for labor represents the biggest threat to the US economy.
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The labor force participation rate, which measures the percentage of Americans over the age of 16 who are working or looking for work, fell to 62.1% in July after peaking at 62.4% earlier this year. The figure is also much lower than the 63.4% rate that was recorded before the pandemic, according to the Ministry of Labour.
The shortage has also contributed to almost four decades of high inflation, which was 8.5% in July. While energy shortages and supply chain problems that fueled inflation last year have begun to ease, these pressures have been replaced by a tight labor market that has seen private sector wages and salaries grow by 5.7% since last year.
The Fed has tried to curb inflation by raising interest rates, which economists say could also cool demand for labor. Meanwhile, workers currently participating in the labor market are seeing their roles expand as companies struggle to fill gaps in their organization.
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“While wages have risen, they may not have risen enough to compensate for the fact that when everyone is understaffed, it means you have to do extra work,” Peter Berezin, chief strategist at BCA Research, told Wall Street. Journal. “Employers may have to raise wages significantly in [inflation-adjusted] terms, which would make the Fed’s life more difficult.”