MNI: Strong Job Matching Aids Soft Landing Case-Fed Economist

Minneapolis Fed economist Simon Mongey told MNI his research on job matching suggests that counter to the pessimism of some prominent economists, the high vacancy rate can still fall without a spike in unemployment, enhancing the chances of a soft landing.

Research from Olivier Blanchard and co-authors had indicated a jump in the jobless rate would likely result from a drop in vacancies due to the historical relationship between the two indicators. Mongey's findings suggest otherwise.

“Vacancies have been coming down steadily over the past eight few months” despite a 3.5% jobless rate matching 50-year lows, he said in a FedSpeak podcast interview.

“The large stock of vacancies – you can knock a few of them away without having a drastic effect on the number of matches formed in the labor market.”

That means the jobless rate doesn’t have to rise that much simply because vacancies are coming down, a trend thus far corroborated by the data.

STILL MATCHING

Mongey said the work of Olivier Blanchard and co-authors assumes there’s been a fundamental worsening in the job matching process because of the Covid shock.

“If you were to think this is a permanent change in the economy then as vacancies decline you would imagine unemployment would increase,” he said.

“What I find is that this measure of match-efficiency hasn’t deteriorated. You can lop off a lot of those leads without reducing the amount of matches, because you just have so much excess on one side of the market.”

Minneapolis Fed research director Andrea Raffo told MNI this week he thinks the economy can avoid a recession. (See MNI INTERVIEW: Fed’s Raffo Upbeat On Growth, Prices)

SUPER TIGHT

Vacancies data might even be understating job market tightness, Mongey said.

“We’ve got a very tight labor market which means that if you’re a firm and you’re trying to hire, it’s not enough to just open the position and have somebody walk into it, you’re also going to have to go out there and try to recruit as well,” he said.

He’s not worried about the level of labor force participation either, arguing that comparing it to the immediate pre-pandemic period can be deceiving.

“I find it kind of hard to see a drop-off in labor force participation relative to pre-pandemic. If you compare where we are to say mid-2018 … a lot of these participation rates are quite close to what they were before,” said Mongey.

Wage growth has picked up in part because of the large sector reallocation of employment following the onset of Covid, Mongey said, but should subside once the process is complete and shifts from services spending to goods and then back normalize.

“With each of those reallocations workers are receiving wages compensating them for having switched jobs and switched sectors,” he said. “I’d imagine the allocation of employment across sectors at the end of the day is going to look the same. As the process of reallocation slows down, those wage pressures will subside.”