MNI INTERVIEW: US Jobs Market In Fragile Equilibrium - Sahin

The U.S. labor market remains fundamentally healthy but is operating in a fragile “no hire, no fire” equilibrium that could quickly unravel if broader uncertainty intensifies, Princeton University economist Aysegul Sahin, an adviser to the Federal Reserve Banks of Dallas and New York and to the Congressional Budget Office, told MNI.

A co-author of new research into how to interpret 94 official and private labor market indicators in real time, Sahin describes the job market as having cooled through a significant decline in hiring rather than mass layoffs and as now operating near its longer-run trend. 

The fall-off in demand from mid-2022 was recession-like in magnitude but resulted in a soft landing, both because the starting point was an ultra-tight labor market and because it was counteracted by simultaneous supply shocks, she said. Not only did immigration slow, but so did the number of people switching jobs, after a period during the pandemic when many workers had shifted to occupations which better suited them.

“If we didn’t have that supply effect, unemployment would likely be closer to 5%,” she said, citing a finding in her research that short-term supply factors are suppressing the jobless rate by about 75 basis points. The unemployment rate was 4.3% in March. (See MNI POLICY: Fed Embraces Pause As Downside Labor Risks Abate)

NEUTRAL LABOR DEMAND

Though policymakers continue to point to a drop in vacancies since the pandemic -- by 50% and still going -- as a worrisome sign of job market weakness, Sahin said labor demand is in line with historically neutral conditions once starting levels are taken into account, "and there’s no reason that it should keep continuing going down, it could very well stabilize here or start going up." 

The joint declines in labor demand and supply have also kept wage growth firm and generated strong productivity gains, which Sahin argues is less about AI and more about better job matches and firms optimizing their existing workforce.

"Since firms hired a lot after Covid, now they are restructuring so that they get the most out of their workers, and that’s helping productivity to be high." 

Still, policymakers’ focus on a “no hire, no fire” dynamic reflects real risks, Sahin said. “The concern is that firms are between two thresholds -- not hiring, but also not firing,” she said. “If something shifts, they could all move in the same direction.”

That shift is more likely to come from macroeconomic or political developments than from the composition of job growth, which has increasingly tilted toward structurally expanding sectors such as health care, she said.

CONDITIONS STABLE

Sahin and co-authors' framework for reading labor market data is designed as a diagnostic tool rather than a forecasting model, decomposing trends into shifts in demand, supply and matching efficiency, thereby helping policymakers identify which forces are driving changes and where vulnerabilities may lie, she said. 

While private data have proven useful, particularly during periods when official releases are delayed, they remain anchored to decades of historical relationships derived from Bureau of Labor Statistics data, Sahin said. 

The divergences between payroll and household employment measures in recent months -- seized upon by some as evidence that BLS data are increasingly inaccurate -- instead foreshadow future revisions to population estimates, according to their research, she said.

“When you see a persistent wedge, it tends to predict subsequent population adjustments,” she said, pointing to similar episodes in the late 1990s. “These are not just measurement errors -- they are informative.”

For now, the data dashboard suggests labor market conditions are stable. (See MNI INTERVIEW: Fed Has Little Room to Look Past Iran Inflation)

“There’s nothing in the data that says a recession must happen,” Sahin said. “But if there is a large aggregate shock, the adjustment could be very fast.”