The Federal Reserve raised interest rates by another .75% last week, the latest in a series of rate hikes designed to tame inflation. The question looming over the economy now is whether the Fed has gone too far or not far enough. The answer depends on how much slack there is in the labor market. The Fed would like to see labor markets with enough slack that wage growth moderates to a level consistent with their 2% inflation target.
A new, broader measure of labor market tightness, that we created using data from LinkedIn, provides a new way of answering that question. And it suggests labor markets aren’t as tight as other metrics indicate. That, in turn, suggests the Fed may be at risk of raising rates too quickly.The idea of “slack” in the labor market refers to the shortfall in employers’ demand for labor relative to the available supply of workers.
— the key idea is that a slack labor market makes it easier for employers to hire in general, so less recruiting effort is required to achieve the same hiring rate. The analysis suggests that the labor market did not tighten as much during the pandemic as implied by the conventional job openings to unemployment ratio.
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