Figure 3 shows the year-over-year change in firms reporting hard-to-fill openings along the horizontal axis, and the year-over-year change in the unemployment rate on the vertical axis. A decline in hard-to-fill openings – my proxy for job openings in the economy – is associated with an increase in the unemployment rate. In fact, once the number of firms reporting hard-to-fill openings falls by four percentage points over a given year, there are no observations in the data of a stable or falling unemployment rate. And it is likely that hard-to-fill openings would have to fall by much more than this to bring labor demand into better balance with labor supply. For example, the pre-pandemic peak in firms reporting hard-to-fill openings was 39 percent, eight percentage points below the most recent reading for April. The historical record suggests that sort of decline in openings would likely see an increase in the unemployment rate of more than half a percentage point, an increase that has been associated with the start of recessions.2
Figure 2: Proxying Openings With Firms Reporting Positions Not Able To Fill
Chair Powell has kept a brave face when discussing the path ahead for the economy. Unfortunately, the historical relationship between job openings and the unemployment rate suggests that it will be extremely difficult for monetary policy to fine-tune labor demand so carefully that inflation can fall back down to two percent without causing an economic contraction. The reason is straightforward – the reduction in job openings would come about from a decline in aggregate demand, the very same condition that leads to an increase in unemployment. Risks of a contraction may not be imminent, but history suggests that they will rise materially as policymakers work to cool off labor demand.
Figure 3: A Reduction In Openings Tends To Increase The Unemployment Rate
1. Equity and high yield spread moves are through May 16. Corporate spreads based on the ICE BofA US High Yield Index.
2. For example, economist Claudia Sahm has tied a 0.5 percentage point rise in the three-month moving average of the unemployment rate from its low of the previous 12 months to the start of a recession. See Claudia Sahm, “Direct Stimulus Payments to Individuals”, Brookings, May 16, 2019.
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