Is The U.S. Headed Toward An Unemployment Low?

The U.S. unemployment rate recently hit 3.4% in January 2023, the lowest it’s been since 1969, over 50 years ago. This historic low has many economists wondering if it’s here to stay or just temporary.

On one hand, the low unemployment rate shows we have a super tight labor market right now, with lots of job opportunities for workers. The rate has steadily declined over the past few years and been under 4% for a while now. This extended period of low unemployment could mean it’s not just a blip and will continue.

There are also some positive signs for the economy – steady job growth and sustained year-over-year wage increases. All Americans seem to be benefiting too. Unemployment rates for African Americans, Hispanics, and people with disabilities have hit record lows.

The gap between unemployment rates for non-high school grads and college grads has also narrowed to just 2.8 percentage points, the lowest ever. And broader measures of unemployment that include part-time workers who’d prefer full-time jobs are also near historic lows.

With the job market so hot right now, it seems like the low unemployment could stick around. But there are also reasons to be cautious and think it might not last.

Why the low unemployment rate may not persist

While 3.4% unemployment is crazy low historically, economists point out a few things:

• The rate doesn’t account for people who want jobs but have stopped looking. There were still over 5 million of those people not counted in the 3.4%.
• Other recent dips this low have proven temporary. Rates bounced back up again.
• There are signs of slowing demand for workers – job openings dropped, quit rates declined.
• Layoffs are starting to tick up in some sectors like tech and real estate.
• The Fed is intentionally trying to cool the labor market and economy with rate hikes.
• Economists expect higher rates to lead to job losses and unemployment around 4-5% in 2023.

So while the current low rate is great, many economists think it’s a temporary COVID-driven anomaly and will rise again soon. The Fed’s actions to slow inflation will likely cause that itself.

What got us here?

To understand whether 3.4% unemployment will stick around, it helps to look at what factors got us here in the first place:

• Massive government stimulus and support programs during COVID kept unemployment from spiking too high.
• As COVID waned, consumer demand exploded, especially for services. Businesses scrambled to hire.
• Labor force participation lagged demand, due to COVID health concerns, caregiving needs, and early retirements.
• The result was too many jobs chasing too few workers, driving unemployment down.

But some of those dynamics are fading. Government support has ended. Consumer demand is cooling with inflation. Labor force participation is starting to tick back up. So it’s questionable if the same factors will preserve 3.4% unemployment going forward.

Who benefits from the low rate?

While it lasts, the ultra-low unemployment rate has been a boon for workers and job seekers. With employers desperate to hire, workers have enjoyed:

• Pay raises and better benefits to attract and retain talent.
• More flexibility – remote work, flexible schedules, etc.
• More job hopping and leverage to find better opportunities.
• Historically disadvantaged groups like ex-convicts getting more chances.
• Teens and seniors finding it easier to get jobs.
• Businesses willing to train and take chances on inexperienced workers.

Employers have had to work extra hard to recruit and keep workers. Some have struggled to maintain operations and growth. But workers are in the driver’s seat in this job market.

What if unemployment rises again?

If the low rate doesn’t persist and unemployment climbs back up, workers would lose negotiating power. We’d likely see:

• Less leverage and job hopping freedom for workers.
• Wage growth slowing or stopping.
• Benefits and perks scaled back.
• Layoffs and hiring freezes.
• Less willingness to train or take chances on marginal workers.
• Disadvantaged groups struggling more to find jobs.

Essentially, the tables would turn back towards employers. But most economists don’t foresee unemployment spiking to crisis levels like the Great Recession. A rise to 4 or 5% would cool the red-hot job market but not devastate it.

The Fed’s balancing act

The Federal Reserve is trying to pull off a delicate balancing act. They want unemployment to rise to cool inflation, but not so much it causes a recession.

Some key considerations:

• How high can unemployment go before it starts impacting consumer spending?
• Will rising unemployment alongside high inflation lead consumers to hunker down?
• How will debt-burdened consumers handle job losses if rates keep climbing?
• Can the Fed tame inflation without consumer spending taking a nose-dive?

The Fed is entering uncharted territory trying to orchestrate a “soft landing.” Most economists think a mild recession is likely but hope for a short and shallow one.

The bottom line

While the current 3.4% unemployment rate is thrilling, enjoy it while it lasts. Expect the rate to climb in 2023 as the Fed continues raising interest rates to fight inflation. But fingers crossed we don’t see massive layoffs or a huge spike.

A moderate rise to around 4 or 5% unemployment could cool inflation without devastating consumers and the economy. Here’s hoping the Fed can successfully navigate these uncharted waters and we see a “soft landing!” Workers may lose some leverage if unemployment rises but likely not catastrophically.