Questions on the elasticity of the labor market have arisen among economists in the aftermath of Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole Symposium last Friday.
The S&P 500 and Nasdaq reached all-time highs after Powell announced that the Fed’s substantial further progress test for inflation had been satisfied. But economists have been mixed in their forecasts of how the market, and particularly the labor market, will perform in the coming months.
“I think the debate among economists now is ‘How elastic is that job market?’” Kathy Jones, Charles Schwab’s (SCHW) Chief Fixed Income Strategist said in an interview with Yahoo Finance Live. “Will people come back into the job market if there are jobs available and, kind of, temper some of the wage gains?”
Prospects for those on the lookout for jobs have been on the rise for the past few months. Nationwide, job openings continued to rise in August. As employers have looked desperately for new workers in the midst of a multi-industry labor shortage, employees have gained bargaining power. Last week, the U.S. saw its lowest level of new weekly jobless claims since March 2020.
Many employees are now choosing to maintain more flexible work schedules and remote work attained during the onset of the coronavirus pandemic. Wages have begun to rise, though high inflation threatens to neutralize those gains.
Overall, the Fed is still keeping a close eye on the labor market. Economists have raised concerns regarding the delta variant and its potential to spread among children returning to school. Variants of the virus have been shown to be more easily spread among children than the original strain; too many outbreaks at schools could force children to learn virtually at home and put parents in predicaments in which childcare may worsen economic burdens.
“I think what they’re trying to do is focus really on that employment mandate,” Jones said. “And the lesson from the last cycle was that they didn’t really wait long enough to let employment come back as much as it can.”
Powell’s most recent announcement at Jackson Hole was optimistic in nature, highlighting the progress made with the labor market and assuring the public that the Fed’s tapering will not mean raised rates. Even so, he acknowledged that there is still work to be done on the employment front and abandoning certain strategies too early would be a mistake.
“There are economists who think that the labor market won’t heal [in line with Powell’s predictions], and that we permanently lost a lot of workers, and that’s going to cause a wage price spiral,” Jones said. “But we haven’t seen one of those since the ’70s. So I wouldn’t be in the camp waiting for that to happen.”
Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.
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