Unemployment fell to 3.5% under Biden. For how much longer ?

WASHINGTON – President Joe Biden continues to see good economic news and poor public approval ratings. The unemployment rate fell to 3.5% in March. Over 236,000 jobs have been added. But there were no political rewards for the president.

WE. adults ignore employment numbers and generally feel horrible about the economy. White House aides can list many reasons for the pessimism: high inflation, the hangover from the pandemic, and the political polarization that automatically leads Republicans to believe the economy is doing badly under a Democratic president.

Going forward, an emerging challenge for Biden could be the expectation of worsening unemployment this year.

This is the opinion of the Federal Reserve, which expects the unemployment rate to reach 4.5%. And the Congressional Budget Office (5.1%). Even the proposed budget Biden just presented models an increase (4.3%) from the current rate. Similarly, many Wall Street analysts operate under the shorthand that the Fed is controlling inflation by raising interest rates, which in turn causes demand to fall and unemployment to rise.

Friday’s jobs report showed the economy cooling as wage growth slows, but the labor market is still much hotter than the overall economy in a way that may stoke doubts. Biden’s bet is that conventional economic wisdom is wrong and that 6% inflation can be beaten while keeping unemployment low.

“We continue to face economic challenges from a position of strength,” Biden said in a statement on the latest jobs report.

A new independent economic analysis helps show why low unemployment has yet to resonate with people: There aren’t enough workers to fill job vacancies, so the economy is running with speed bumps and frictions that make things worse than they are. in the data. The analysis suggests that the economy would likely run much more smoothly with unemployment above 4.6%, although that could translate to nearly 2 million fewer people in work.

The labor market is what economists call “inefficiently tight,” a problem the United States also faced during the Vietnam War, Korean War, and World War II. The current sealing is as severe as it was at the end of the Second World War. This mismatch gives businesses and consumers the feeling that the economy is in a rut, said Pascal Michaillat, an economist at Brown University.

“For traders, this means working shorter hours because it is not possible to find workers to fill the extra time slots,” he said. “For households, that means more time trying to hire nannies, plumbers or construction workers and less time doing nice things.”

Based on his calculations of vacancies and employment from a 2022 article written with economist Emmanuel Saez, Michaillat estimates that an unemployment rate of 4.6% would make the labor market effective. At this rate, the daily transactions that shape an economy would have less friction because the demand for workers would be closer to the supply. Government figures released on Tuesday show employers have 9.9 million job vacancies, nearly double the number of unemployed looking for work.

Seems like a good problem to have as it implies salaries should go up. But economic theory suggests that the only way to solve this situation is to increase unemployment.

Asked what this dilemma might mean for Biden, Michaillat suggested, “Economics is intermingling with politics, as it so often does.”

When Republicans criticize Biden, it’s often for the kinds of shortages Michaillat describes, as well as inflation.

House Ways and Means Committee Chairman Jason Smith, R-Mo., said small business owners “tell us that Democrats’ anti-labor policies have made it hard to stock their shelves, the hiring workers and keeping their doors open”.

More than two years after Biden’s $1.9 trillion coronavirus relief package took effect, it’s humble frustration for the White House that so many people think the economy is terrible while its employment record is unmatched among modern presidencies.

Biden’s unemployment rate is so far better than that of Presidents Ronald Reagan, Bill Clinton, Barack Obama, Jimmy Carter, Gerald Ford and both Bushes. While unemployment was lower during a period under Presidents Lyndon Johnson and Richard Nixon, a smaller proportion of people were in the labor force than today.

Biden has decided to use COVID-19 aid dollars to get people back to work quickly and prevent the typical “scars” of recessions that can leave people earning less for the rest of their careers and, in some cases, without permanent job. He succeeded in this mission because the economy has about 4 million more jobs than the Congressional Budget Office had expected at this point.

A White House official said the policies were designed with the specific goal of bringing jobs back faster than in previous recoveries. After the Great Recession began in late 2007 and the economy collapsed, it took more than six years for the total number of jobs in the United States to return to pre-recession levels. During the pandemic recovery, the total number of jobs rebounded to its previous level in just over two years.

The speed of the rebound has benefited historically disadvantaged groups. Black unemployment in March fell to 5%, the lowest level on record. And the black labor force participation rate – which measures how many people are employed or looking for work – surpassed white levels last month.

The official, who spoke on condition of anonymity to discuss private conversations, said Biden’s goal was to spur a wave of hiring that would drive strong long-term growth. Had the job recovery been prolonged, some people would lose hope and leave the labor force, reducing the economy’s ability to grow for decades to come.

Biden has dismissed criticism that the scale of COVID relief has contributed to inflation, although research published by the New York Fed indicates that federal aid accounted for about a third of inflation more high from the end of 2019 to June 2022.

Nick Bunker, director of economic research at Indeed Hiring Lab, said Friday’s jobs report indicated the jobless rate is not expected to rise over the next three months. He said hiring is always greater than demographic gains.

He noted the strength of job growth compared to the Great Recession, but said many people are still adjusting to the realities of higher inflation and the consequences of the pandemic.

“There are clear benefits to the speed of this recovery,” Bunker said. “Speed ​​is great because it gets you there, but it can be confusing because there’s a boost.”