A labor market view on the risks of a U.S. hard landing / Alex Domash, Lawrence H. Summers.

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Domash, Alex

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w29910.Publication details: Cambridge, Mass. National Bureau of Economic Research 2022.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper uses historical labor market data to assess the plausibility that the Federal Reserve can engineer a soft landing for the economy. We first show that the labor market today is significantly tighter than implied by the unemployment rate: the vacancy and quit rates currently experienced in the United States correspond to a degree of labor market tightness previously associated with sub-2 percent unemployment rates. We highlight that the super-tight labor market coincides with current wage inflation of 6.5 percent - the highest level experienced in the past 40 years - and that firm-side slack measures predict further increases in wage inflation over the coming year. Finally, we show that high levels of wage inflation have historically been associated with a substantial risk of a recession over the next one to two years. We argue that periods that historically have been hailed as successful soft landings have little in common with the present moment. Our results suggest a very low likelihood that the Federal Reserve can reduce inflation without causing a significant slowdown in economic activity.

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Previous	nber w29908 Estimating General Equilibrium Spillovers of Large-Scale Shocks /	nber w29909 Housing Market Expectations /	nber w2991 Why do World War II Veterans Earn More Than Nonveterans? /	nber w29910 A labor market view on the risks of a U.S. hard landing /	nber w29911 Measuring Relative Poverty through Peer Rankings: Evidence from Côte D’Ivoire /	nber w29912 Dads and Daughters: Disentangling Altruism and Investment Motives for Spending on Children /	nber w29913 Welfare Implications of Electric-Bike Subsidies: Evidence from Sweden /	Next

April 2022.

This paper uses historical labor market data to assess the plausibility that the Federal Reserve can engineer a soft landing for the economy. We first show that the labor market today is significantly tighter than implied by the unemployment rate: the vacancy and quit rates currently experienced in the United States correspond to a degree of labor market tightness previously associated with sub-2 percent unemployment rates. We highlight that the super-tight labor market coincides with current wage inflation of 6.5 percent - the highest level experienced in the past 40 years - and that firm-side slack measures predict further increases in wage inflation over the coming year. Finally, we show that high levels of wage inflation have historically been associated with a substantial risk of a recession over the next one to two years. We argue that periods that historically have been hailed as successful soft landings have little in common with the present moment. Our results suggest a very low likelihood that the Federal Reserve can reduce inflation without causing a significant slowdown in economic activity.