The Federal Reserve’s aggressive drive for lower growth and tame inflation through higher interest rates led to a remarkable increase in American employers adding 517,000 jobs in January.
The unemployment rate fell to 3.4 percent, its lowest level since 1969.
Friday’s government report affirmed the resilient picture of the labor market. It has low unemployment, few layoffs, and plenty of job opportunities, even though most economists predict a recession. While this is good news for workers, the steady demand from employers for labor has helped to accelerate wage growth as well as contributing to high inflation.
The January wage data may have provided some comfort to Fed inflation watchers: Average hourly earnings rose by 4.4 percent compared to a year ago, which is slower than the December increase of 4.8 percent. Wages increased by 0.3 percent from December to January, which is below the 0.4% increase in December.
In addition to the record-breaking job growth reported by the government for January, the government also revised its estimates of November and December employment gains by 71,000.
Last month, more Americans entered the workforce. The so-called labor force participation ratio, which measures the percentage of adults who have a job or are looking for one, ticked up to 62.4 percent. This was the highest level since March last year, but still far below pre-pandemic levels.
January’s job growth was much higher than December’s 260,000, extending a streak that saw strong hiring gains. This raised concerns about the Fed’s inflation pressures. To contain inflation, the Fed has increased its key rate eight more times since March. However, it has slowed down since then.
Companies are still looking for more workers, and they are holding on to the employees they do have. Even ignoring some notable layoffs at tech giants like Microsoft, Google, and Amazon, the majority of workers are still enjoying unusual levels of job security, even though many economists predict a recession.
The economy added an average of 375,000 jobs per month for all of 2022. This pace was strong enough to contribute to the severe inflation Americans have suffered in the past 40 years. Inflation is caused by a tight labor market.
To reduce inflation and stimulate the economy and job market, the Fed has increased borrowing rates steadily, most recently Wednesday. Since June’s peak at 9.1 percent, year-over-year consumer inflation has steadily declined. However, at 6.5 percent in December inflation is still well above the Fed’s target of 2 percent. This is why central bank policymakers have reiterated that they intend to continue raising borrowing rates for at most a few months.
The Fed’s goal is to achieve a soft landing — a pullback in an economy that is just enough for high inflation to be controlled without triggering a recession. Employers can reduce wage increases and inflationary pressures, but not necessarily by cutting back on employment.
However, the resilience of the job market isn’t making this outcome easier. The Labour Department reported Wednesday that 11 million jobs were posted by employers in December. This is an unexpected increase from the 10.4 million November job openings and the highest number since July. On average, there are two job openings for every unemployed American.
For 21 consecutive months, the Labour Department’s monthly count has been below 1.5 million. This figure was the lowest recorded in two decades, and it has not fallen so low since 2021.
Another indicator that workers are enjoying unusual job security is the weekly increase in people applying for unemployment benefits. This number is an indicator of layoffs and one economist’s track to see if there are any. Thursday’s government statement stated that the number of jobless claims dropped to its lowest level since April.
Despite a steady stream of headline-grabbing layoff announcements, the rate of unemployment aid applications has not slowed down. Facebook parent Meta is reducing 11,000 jobs, Amazon 18,000, and Microsoft 10,000 respectively, while Google 12,000 are being eliminated. Many economists believe that many laid-off workers are not showing up at unemployment because they can find new jobs quickly.
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