Just how unbalanced is the labor market?

This question has become one of the biggest debates in economics today. Federal Reserve Chairman Jerome Powell and his fellow officials at the Federal Reserve see the labor market as extremely unbalanced, with demand for workers far outstripping supply. Others, however, have argued that the Fed’s view of labor markets is distorted in a way that exaggerates demand.

Powell has been very clear about his position for several months. Recall that he used to argue that the Fed might be able to bring down inflation without raising unemployment by very much by lowering the number of job vacancies. Initially, Powell seemed to have a great deal of confidence that an improving economy could bring workers off the sidelines, reducing vacancies by filling them. The unbalanced supply and demand of labor could be rebalanced upward.

He seems to have abandoned that view and now talks about the likelihood that the tightening of financial conditions will cause “pain.” But the underlying message is the same: demand for labor will need to fall to bring it back into balance with the supply of workers.

“The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers,” Powell said in Jackson Hole last month.

In today’s remarks to a Cato Institute conference, Powell sounded the same note. “What we hope to achieve is a period of growth below trend which will cause the labor market to get back into better balance and that will bring wages back down to levels that are more consistent with 2% inflation over time,” he said.

By subscribing, you agree to our terms of use & privacy policy. You will receive email marketing messages from Breitbart News Network to the email you provide. You may unsubscribe at any time.

The economic theory here is that job vacancies, as measured by the Job Openings and Labor Turnover Survey (JOLTS), can be thought of as the unmet demand for labor, and the number of unemployed people can be thought of as the available supply of labor. The ratio of vacancies to unemployed people has become a central measure of the tightness of the labor market in academic economic literature.

The historical average ratio is around 0.6 vacancies to each unemployed person. Which means that we typically have more people looking for work but out of a job than we have jobs available. In other words, the normal situation for decades before the recent crisis was that we had too little demand relative to supply, we were beset with labor market slack. The all-time low for the ratio was 0.15 vacancies to each unemployed person hit in the wake of the global financial crisis. The all-time high, prior to recent years, was 1.5 in the “hot” labor market of the 1960s.