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The labor market is tighter than low unemployment and labor force participation rates suggest, say Jason Faberman of the Chicago Fed and Andreas Mueller and Ayşegül Şahin of the University of Texas at Austin. Comparing the number of hours individuals want to work with those they actually work, they find that desired hours of work fell by 4.6% across all individuals between February 2020 and the end of 2021, nearly doubling. the 2.3% decline in labor force participation. These trends are mainly driven by inactive people and part-time workers changing the number of hours they are willing to work, rather than broad changes in the desire to enter the labor market. They are consistent across most demographic groups, with larger declines among those without a college degree. Notably, the authors do not find that desired hours declined significantly more for women than for men, despite documented gender disparities in child care burdens caused by COVID-19. The authors also show that workers in jobs involving some degree of social contact saw particularly large reductions in desired work hours, but those in low-contact jobs actually increased their desired work hours.
The unemployment rate soared at the start of the COVID-19 pandemic before falling back to pre-pandemic levels. The natural unemployment rate — the rate that is consistent with full employment and stable inflation — had a longer-lasting response, according to Richard K. Crump of the Federal Reserve Bank of New York and his co-authors. The authors estimate that the natural rate of unemployment fell from 4.5% to 5.9% over the period 2019-2021, with the estimate driven by strong wage growth rather than rising inflation expectations or the level of inflation. Modeling the Phillips curve relationship – the trade-off between inflation and a slowing labor market – the authors estimate that the deviation of the real unemployment rate from its natural rate will push inflation up by 0.5 points percent above its long-term trend until the end of 2023, although long-term inflation expectations remain well anchored. Recovering labor force participation could help ease wage pressures and lower inflation, although such changes are likely to occur in the long run, the authors conclude.
In the United States, wealth is more unequally distributed than income, perhaps because the rate of return on assets is higher for wealthier households. Using housing market data, Jung Sakong of the Federal Reserve Bank of Chicago finds that poorer households are more likely to buy a home during an economic boom – when expected returns are lower – and sell after a recession, when expected returns are higher. According to his calculations, a 10% increase in net worth is associated with an increase of about 12 basis points in annual return. Consistent with these trends, geographic regions with higher housing market volatility have larger differences in wealth inequality relative to income inequality. He concludes that government policies aimed at increasing wealth by encouraging home ownership could backfire.
Graphic courtesy of The Wall Street Journal
“In my view, labor market conditions have been and are currently consistent with the FOMC’s maximum employment target, and as such I have focused on continued high inflation…I support the increase in the fed funds rate at our next meeting in March and, if the economy evolves as I expect, further rate increases will be appropriate in the coming months. I will be watching the data closely to judge the appropriate size of an increase at the March meeting In early March, the FOMC will finally stop expanding the Federal Reserve’s balance sheet The resulting end of our pandemic asset purchases will remove another source of unnecessary stimulus over the next few months, we will need to take the next step, which is to start reducing the Fed’s balance sheet by ceasing to reinvest the maturing securities already held in the portfolio. a level appropriate and manageable will be an important additional step towards tackling high inflation,” said Michelle Bowman, Governor of the Federal Reserve.
“I expect these measures to contribute to an easing of inflationary pressures in the coming months, but further measures will probably be necessary this year to tighten monetary policy. Beyond this spring, my opinion on the The appropriate pace of interest rate increases and balance sheet reduction for this year and beyond will depend on how the economy plays out, and I will focus particularly on the progress we are making in reducing inflation. would be to take strong action to help reduce inflation, bringing it back toward our 2% target, while keeping the economy on track to continue creating jobs and economic opportunity for Americans.
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