Maybe the effect of raised interest rates on employment is less visible, because before raising them, the businesses were seriously understaffed? Meaning that maybe some jobs were lost due to raised rates, but they were 'virtual' - not taken by anyone. Is there a way to measure that?
That's a very good point. Naturally observing under-staffing is probably impossible. But there are a few ways we can look at it.
1. There vacancy (job postings) to unemployment ratio. (note: job postings are not unique - i.e. a firm can post the same job multiple times, but this is not as big of a concern, because posting the same job multiple times reflects job intensity) Here's a good article on the state and data of v-to-u (vacancy to unemployment ) - https://pmichaillat.substack.com/p/all-quiet-on-the-labor-market-front . It does suggest that there has been a drop in the v/u ratio. But is it big enough to justify the near 6 percentage point drop in inflation - probably not. As Pascal Michaillait demonstrates, we are still far from optimal labor tightness.
3. Has consumption dropped? Basically, if people are demanding fewer goods, firms are less likely to need expand/hire. Here's a measure of consumption - https://fred.stlouisfed.org/series/PCEC96 . This suggests very little slow down meaning that the demand is still there.
All in all - yes, the raising of interest rates has 'tightened' the labor market by reducing worker demand through the reduction of job postings and these understaffed positions. But, in my opinion, it is unlikely that this made a big dent on inflation (at least not the 6pp drop). Actually, that is my concern going forward - we should see some of this standard effect of interest rates increasing unemployment at some point. But we will see.
@1 also company could have a single ad for multiple positions - if you have a warehouse and need 10 employees, you will have a single ad and just hire multiple people who apply.
@3 - well how could the demand fall, if nooone actually lost a job?
@3 - Yes.. Theoretically then, I'd think firms would have little reason to withdraw some of their vacancies. If 6 months ago, they wanted to hire someone given the demand metrics, but they didn't, wouldn't they still want to want to hire today given demand metrics are similar? Of course, they might be concerned about the next 12-24 months, and even though demand is high today, they're worried about future demand, so they withdraw this vacancy. But then, recent retail data suggests the US economy is still booming today.
I do believe the interest rate did dampen the demand channel somewhat (and firms reduced vacancies in response), but nowhere near enough to be responsible for the fall in inflation we have observed. And we observer that in the UK, for example, inflation is still very high even though interest rates are comparable. But the UK has much larger supply issues than US (energy, food, trade policy).
Maybe the effect of raised interest rates on employment is less visible, because before raising them, the businesses were seriously understaffed? Meaning that maybe some jobs were lost due to raised rates, but they were 'virtual' - not taken by anyone. Is there a way to measure that?
That's a very good point. Naturally observing under-staffing is probably impossible. But there are a few ways we can look at it.
1. There vacancy (job postings) to unemployment ratio. (note: job postings are not unique - i.e. a firm can post the same job multiple times, but this is not as big of a concern, because posting the same job multiple times reflects job intensity) Here's a good article on the state and data of v-to-u (vacancy to unemployment ) - https://pmichaillat.substack.com/p/all-quiet-on-the-labor-market-front . It does suggest that there has been a drop in the v/u ratio. But is it big enough to justify the near 6 percentage point drop in inflation - probably not. As Pascal Michaillait demonstrates, we are still far from optimal labor tightness.
2. What do firms say in surveys? Here is some data on that - https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F5700dac7-1c5a-405b-a755-15e64f4c8498_2886x1843.png - suggests that labor constraints have eased a bit - but again not as significantly.
3. Has consumption dropped? Basically, if people are demanding fewer goods, firms are less likely to need expand/hire. Here's a measure of consumption - https://fred.stlouisfed.org/series/PCEC96 . This suggests very little slow down meaning that the demand is still there.
All in all - yes, the raising of interest rates has 'tightened' the labor market by reducing worker demand through the reduction of job postings and these understaffed positions. But, in my opinion, it is unlikely that this made a big dent on inflation (at least not the 6pp drop). Actually, that is my concern going forward - we should see some of this standard effect of interest rates increasing unemployment at some point. But we will see.
@1 also company could have a single ad for multiple positions - if you have a warehouse and need 10 employees, you will have a single ad and just hire multiple people who apply.
@3 - well how could the demand fall, if nooone actually lost a job?
@1 - In terms of the chart data, where I should've been more on topic, the v/u ratio is based on monthly survey data collected from companies by the Bureau of Labor Statistics. The companies get asked how many vacancies do they have. A helpful overview of this data is here - https://pmichaillat.substack.com/i/122049052/vacancies-are-not-well-measured-in-official-statistics \
@3 - Yes.. Theoretically then, I'd think firms would have little reason to withdraw some of their vacancies. If 6 months ago, they wanted to hire someone given the demand metrics, but they didn't, wouldn't they still want to want to hire today given demand metrics are similar? Of course, they might be concerned about the next 12-24 months, and even though demand is high today, they're worried about future demand, so they withdraw this vacancy. But then, recent retail data suggests the US economy is still booming today.
I do believe the interest rate did dampen the demand channel somewhat (and firms reduced vacancies in response), but nowhere near enough to be responsible for the fall in inflation we have observed. And we observer that in the UK, for example, inflation is still very high even though interest rates are comparable. But the UK has much larger supply issues than US (energy, food, trade policy).