The Job Market Fights the Fed


Maybe the Federal Reserve won’t have to dent America’s job market as much as it thought it might. 

Friday’s employment report was close to perfect. The Labor Department reported that the economy added a seasonally adjusted 315,000 jobs last month—not as many as July’s torrid 526,000 job gain, but still very solid and for once in line with economists’ forecasts.

The unemployment rate rose to 3.7% from July’s 3.5%, but for a good reason: More people went on the job hunt last month and were therefore counted as unemployed. Average hourly earnings increased by 0.3%, which was less than economists expected, suggesting that wage pressures aren’t intensifying.

It is, of course, just one month’s-worth of data, subject to revision, and as a result perhaps unlikely to convince Fed policy makers that they should raise rates by anything less than three-quarters of a percentage point when they meet later this month. But maybe, with the pandemic easing, more people will be entering the workforce, making it easier for employers to find workers, alleviating downward pressure on the unemployment rate and keeping wage growth from jumping too much.

There is scope for that to happen to at least some degree. The labor-force participation rate—the share of the working-age population either working or actively seeking work—rose to 62.4% in August from July’s 62.1%. That is still well below what it was prior to the pandemic. To get back to the 63.4% participation rate registered in February 2020, nearly three million people would need to join the labor force.

Whether participation could increase so much is unclear considering demographic patterns such as reduced immigration and an aging population. Still, there should be some scope for further improvement. Many people remain hesitant to return to work because of worries about Covid-19, while at any given time many others aren’t working because they are ill.

But with Covid test-positivity rates declining in recent weeks, it looks as if the surge in cases driven by Omicron subvariants has crested. The coming booster campaign could, at least for a time, reduce Covid cases while making some people less worried about contracting the disease. That could pave the way for higher labor-force participation.

It would be a welcome development for the Fed because businesses’ demand for workers is likely to remain high for some time yet. Earlier this week, the Labor Department reported that there were a seasonally-adjusted 11.2 million unfilled job openings at the end of July, matching a record two jobs for every person counted as unemployed set in March.

Moreover, there were only 240,000 more jobs in the U.S. last month than there were in February 2020, an increase of just 0.16%. Meanwhile, gross domestic product in the second quarter was an inflation-adjusted 2.6% higher than in the fourth quarter of 2019, while gross domestic income—an alternative measure of the economy that some studies suggest is a more reliable real-time gauge of activity—is up by 6.4%. 

Even if businesses have gotten more productive, they probably need more workers just to keep up. There are also many sectors that have fewer workers now than they did before the pandemic, including restaurants, state and local education, barber shops and hair salons, child care and hotels. Future job growth in those areas seems natural.

Even with such forces in place, it would be a mistake to think that the Fed can’t, in its efforts to cool inflation, raise rates enough to stall job growth—of course it can. But doing so could cause a lot of collateral damage to the labor market. It would be better if the central bank didn’t have to go there.

Write to Justin Lahart at Justin.Lahart@wsj.com

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