The Resilience of the US Economy: Examining the Impact of Interest Rates, Inflation, and Labor Dynamics

After 10 interest rate hikes, the US economy and employment have remained stubbornly resilient against the Federal Reserve’s attempts to slow it down. What has been the effect of inflation and interest rates on jobs and labor? 

BLS Report and Its Effect on Interest Rates

The US job market remains strong but has been showing signs of slowing compared to 2022 and 2021. According to the Bureau of Labor Statistics’ recent report for September 2023, non-farm payrolls grew by 336,000 jobs, dramatically exceeding analyst expectations of 170,000. Average hourly earnings increased by 7 cents to an average rate of $33.88 per hour. This continued expansion of the broader job market, along with a low unemployment rate, has kept the economy out of recession so far this year. A weakening job market could encourage the Fed to hold interest rates steady for the remainder of 2023, but this surprising job gains number, along with the unemployment rate holding at 3.7%, will almost assuredly encourage the Federal Reserve to increase rates once more this year. 

Unlike the American Worker, Inflation Wasn’t Transitory 

Last year, we were told by the Fed and Janet Yellen that inflation was transitory, and we now know they were mistaken. What has remained transitory is the US worker. Since the Great Resignation, workers have been changing jobs by millions per month, and September was no exception. Of job separations in September, the number of people who separated due to quitting vs. layoffs or downsizing was still 2:1, showing that workers are still quitting and changing jobs. While many people quit their jobs to leave a bad boss, enhance work/life balance, or seek career advancement, many are leaving to secure a salary increase to combat inflation. Inflation and the cost of living are large reasons why we see so much turmoil within the unions seeking significant wage increases for workers this year. 

Why Is the Unemployment Rate Still So Low? 

In the face of interest rate and inflation headwinds, why has the unemployment rate remained unusually low? The answer is that the labor participation rate is still below pre-pandemic levels. Two of the biggest reasons for the low participation rate is the exit of the baby boomers from the workforce and slow population growth. Another reason is the stimulus and unemployment checks, as well as child tax credits, which allowed families to transition from a two-income to a single-income household. As inflation continues to erode family budgets, we will likely see an increase in the labor participation rate in 2024, as those who stayed on the sidelines due to government programs, as well as retirees seeking to replenish their savings, re-enter the workforce to offset inflation.