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Tight labor markets to remain tight

Fed Chair Powell characterized labor markets as “very, very tight … tight to an unhealthy level” at his press conference following the FOMC’s March 15-16 meeting. But just how tight are labor markets, and to what extent are they contributing to the acceleration in nominal wages and non-wage benefits offered by businesses? What are the other implications? Could labor market tightness ease faster than we and markets currently anticipate?

In summary:

*Labor markets today are tighter than at any point in recent history, measured by a wide array of indicators of labor demand, supply, and slack (Table 1).

*The shortages in labor supply are constraining production, economic activity, and profits. Tight labor market conditions and rising inflation and inflationary expectations are projected to keep nominal wage growth elevated through 2022.

*We expect tight labor market conditions to persist, with the unemployment rate receding further. In order for labor market tightness to dissipate as the Fed hopes, economic growth would likely need to slow sharply.

Table 1: Measures of labor market slack

Source: Bureau of Labor Statistics, Haver Analytics, Berenberg Capital Markets

Mickey Levy, mickey.levy@berenberg-us.com

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

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