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the reasons for the overheating of the labor market

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As we know, the economy is made up of paradoxical situations. While in February Joe Biden, the President of the United States, welcomed the “America’s Return to Work” With an unemployment rate close to its pre-pandemic level (3.6% in March), full employment is about to turn into a headache for the world’s largest economy.

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Recently, the president of the American central bank, Jerome Powell, expressed concern about the level of tension accumulated in the labor market: with more than 1.7 job offers for one unemployed person, the level of employment would be even “unhealthy”according to the president of the American central bank (Fed).

The political priority of full employment

How would these figures represent a danger for the American economy? To understand this, a little backtracking is necessary. In recent years, the United States has made full employment a political priority. “Whether it is the Trump or Biden administration, there has been a very strong desire to create overheating in the job market, with the aim of bringing back employment, thanks to salaries more attractive, people who were far from it, even if it means creating a little inflationary tension”, explains Bruno de Moura Fernandes, economist at Coface.

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It is moreover on this basis that the Fed, which has a dual mandate of price stability and full employment, has turned the printing press, allowing the government to finance gigantic economic recovery plans. . In 2020, it reviewed its doctrine by setting itself the objective no longer of “full employment”, but of a “maximum employment rate”. “Without going into technical details, the idea of ​​this new doctrine is for growth to be more inclusive, benefiting all employees more. But the only way to achieve this is to have a very tight labor market, in order to raise wages,” explains Anton Brender, chief economist of Candriam.

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wage war

Initially, this worked well, since at the end of the health crisis the United States was among the first countries to return to its pre-crisis level of unemployment. “This dynamic has made it possible to restore bargaining power to employees vis-Ă -vis employers, particularly in the service and trade sectors, which had very low wage levels”, explains Anton Brender. Last spring, the big brands, such as Amazon or McDonald’s, waged a frantic war to try to attract and retain employees. In the hotel and catering industry, wages increased by 18.3% in 2021.

Except that in parallel occurred the phenomenon known as the “great resignation”. In 2021, more than 38 million Americans left their jobs, and they were still 4.5 million in March to quit, compared to the 11.5 million job offers available. “There has been a lot of literature on the root causes of this wave. For example, have the confinements encouraged people to change their lives? In any case, such a level of voluntary resignations had never been observed before,” notes Bruno de Moura Fernandes.

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Recruitment challenges escalate

For now, it seems that the majority of these resignations have rather been an opportunity for workers to change companies or sectors, but economists fear that this wave amplifies tensions. “The United States still has not returned to its pre-crisis employment level. Today there are 300,000 fewer workers than before the crisis, which accentuates the recruitment difficulties for companies,” explains Christophe Blot, economist at the French Observatory of Economic Conditions (OFCE).

With such overheating, the risk is of not being able to meet consumer demand, and therefore of halting growth. According to recent figures, companies in the American private sector created 140,000 fewer jobs than expected in April, due to recruitment difficulties.

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Added to this, the return of inflation, which with the war in Ukraine could settle permanently in the landscape, has come to singularly complicate the task of the Fed. In March, it peaked at 8.5%, the fastest rate since December 1981. However, with an ultra-tight labor market, there is a high risk of seeing the dreaded price-wage loop set in motion.

“So far, real wage increases are not enough to offset inflation, but the Fed believes that tensions are too high to let prices slide,” deciphers Christophe Blot. This is the meaning of the brake that the Fed gave on May 4 to its monetary policy. The challenge is to succeed in cooling the economy, without disrupting growth.

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