Tight Labor Market Despite Economic Slowdown

January 26, 2023

Source: Bloomberg Finance Source: Bloomberg Finance

Recent economic data is showing the impact of tightening measures by the Federal Reserve (Fed). Various indicators show that the manufacturing sector is in contraction, while retail sales produced negative growth over the last two months. Despite ongoing layoffs in the technology and financial services sectors, most labor market indicators are still displaying a robust labor market. The tight labor market is not just a U.S. phenomenon, as the unemployment rate is at record low in Europe, even as the continent copes with a war and energy crisis.

In the U.S., the main reasons driving a chronic shortage of workers are 1) labor-force participation, 2) early retirements and 3) immigration.

As you can see from this week’s Chart of the Week, the labor-force participation rate has been in a downtrend over the last two decades, as the demographics of the U.S. population have trended older and led to an aging workforce. Currently, the participation rate is about 1% lower than the pre-pandemic level, which equates to about 1.6 million workers since the total labor force in the U.S. is approximately 165 million.

The Fed’s research also estimated that 2 million “excess retirements” due to the pandemic would occur by the end of 2022.1 The reality that the pandemic changed many people’s priorities in life has contributed to why we see an elevated retirement rate among the over-50 age group. In response, many companies are offering flexible work schedules to entice employees away from potential early retirements.

Additionally, the pandemic has created a gap in immigration. Fed Chair Jerome Powell said, “The combination of a plunge in net immigration and a surge in deaths during the pandemic probably accounts for about one-and-a-half million missing workers.”2 Research shows that working-age, foreign-born employees in the accommodation-and-food-services industry (a subsection of leisure and hospitality) saw the greatest decline during the pandemic, with some estimates indicating there are now millions fewer in this group compared to pre-pandemic levels.3

Key Takeaway

The labor market has remained tight after record rate hikes. We are seeing weakening economic data in recent months, which should eventually translate into a weaker labor market. The labor market’s weakness is a key for inflation outlook and Fed policy. We will be monitoring this situation closely.



1Source: Board of Governors of the Federal Reserve System- "The Great Retirement Boom": The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation; 11/30/22

2Source: Board of Governors of the Federal Reserve System- Inflation and the Labor Market; 11/30/22

3Source: U.S. Bureau of Labor Statistics- About the Accommodation and Food Services Sector; 1/24/23

Tags: Economic data | Federal Reserve | Labor Markets | Labor force participation | Economic weakness

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