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As inflation weighs on the economy, some experts are forecasting unemployment to rise – but that’s not necessarily bad news for everyone. Even laid-off workers can have an advantage in a market where demand still exceeds supply.
Forbes Advisor informally polled a variety of industry experts — from CEOs, who are directly affected by today’s job market, to economists and analysts — on their predictions of whether unemployment will rise in the fourth quarter of 2022. 63 percent of respondents think that their unemployment will climb.
The unemployment rate was 3.7% in August, its lowest level in two decades.
“Inflation is hitting businesses due to higher input costs, energy costs, raw materials and supply chain barriers putting additional strain on organizations,” said Indu Tyagi, chief strategy officer at Market Research Future, a consumer research firm. “According to our forecasts, unemployment could rise to 3.8% in the fourth quarter.”
But the job market is so competitive that even a modest rise in unemployment isn’t enough to hurt most workers, says Daniel Altman, chief economist at Instawork.
“The job market has been tight for so long,” says Altman. “Companies may be afraid of losing the employees they have held on to.”
Why the labor market is confusing
The current job market is a strange concoction of labor shortages, new hires, (some) layoffs and uncertainty about what’s to come. And it’s playing out amid relentless inflation and a spate of rate hikes by the Federal Reserve.
While some large companies like Goldman Sachs are expected to lay off hundreds of workers, industries like healthcare and durable goods manufacturing are struggling to find and retain skilled workers.
Some experts cited the growing labor force as a possible cause of rising unemployment.
As more people re-enter the labor market or are entering the labor market for the first time, the unemployment rate could rise if jobs don’t keep up with workers. In August, when there were 315,000 more jobs than in July, unemployment rose slightly to 3.7% from 3.5% in July. One reason is that 786,000 more people have entered the labor market.
“I believe in this trend [higher labor participation rate] will continue and send unemployment numbers skyrocketing,” said Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors. “In this case, higher unemployment can be seen as a good thing because it gives Federal Reserve Board Chairman Jerome Powell a better chance of bailing out the economy by curbing wage inflation.”
Andrew Patterson, Vanguard’s senior international economist, takes the opposite view. Based on internal data, Patterson forecasts that job growth will outpace labor force growth and push the unemployment rate lower in the coming months.
“We don’t expect sustained increases in the unemployment rate through the first quarter of 2023, but we do expect the magnitude of those increases to be modest,” Patterson said. “We expect job vacancies to fall through the end of the year, closing the year closer to 8 million and eventually reaching 6 million by the summer of 2023.”
The workers still have the most power
Anthony Reynolds, CEO of HireVue, is optimistic that even a shrinking economy cannot compete in today’s extremely tight job market.
Read more: Is the US headed for another recession?
“Right now there are two jobs for every job seeker, and I don’t think that’s going to change abruptly unless something completely unpredictable happens,” says Reynolds.
This means that workers today have tremendous bargaining power as the balance between supply and demand is tilted in their favour. And the data shows that employers have taken notice and are doing more to attract and retain employees. The Bureau of Labor Statistics’ August jobs report showed wages rose 5.2% over the past 12 months.
This new balance of power is something employers aren’t used to, Altman says.
“The labor market has been tilted in favor of employers for decades due to offshoring, union spin-offs, new technology and corporate consolidation – now we’re seeing some of that bargaining power returning to workers,” says Altman.
Certainly some of that power shows in the number of people who want to join unions, and even those who only approve.
Union representation petitions filed with the National Labor Relations Board (NLRB) increased by 57% in the first six months of fiscal 2022 compared to the same period prior (October to March). And according to a recent Gallup poll, 71% of Americans support unions, the highest level since 1965.
“The pandemic caused many people to take stock of their lives and livelihoods,” says Altman. “Personal hourly workers were under a lot of pressure during Covid, they were taking a lot of risks at work. To get out of this feeling they weren’t being paid fairly, unionizing was a natural choice.”
In August, the National Federation of Independent Business reported for the third straight month that nearly half of business owners said they had job openings that were difficult to fill.
Michael Siers, an economist with the Maryland Department of Commerce, says this is the ideal time for people to find a job that matches their skills to maximize their earning potential.
“The difficulty of finding workers also translates into higher wages for new hires, making it more attractive than ever for workers to change jobs or re-enter the labor market,” says Siers.
He adds that this is also a good time to make sure your work contributions match your salary. One way to do this is to compare your performance to someone who earns the same as you and to someone who is your manager. If you feel like you’re underpaid, this could be a good time to ask for a raise.
However, some companies may not have the budget to pay more, which is the case when workers have to make the sometimes difficult decision to look for another job.
What employers do for the job market
Employers are in a precarious position to balance today’s demand with future economic downturns such as a recession. They are also staring at a labor shortage that is causing some companies to retain employees they would otherwise lay off in the current economic slowdown.
“I think there might be some labor hoarding,” says Elise Gould, a senior economist at the Economic Policy Institute. “Employers hold on to workers because they’ve had such a hard time rehiring, so they think, ‘Let’s not act too fast,’ even as they anticipate weakness to come.”
Wage inflation is another issue both employers and the Fed will have to contend with as it tries to pull off its soft landing. Wage inflation simply means an increase in nominal wages. When employers have to pay higher wages, those increases are often passed on to the cost of goods and services – pushing up prices and contributing to headline inflation.
Right now we are in a situation where the snake eats its tail as real wages – which measure the purchasing power of the dollar – lag behind inflation. Real average hourly earnings fell 2.8% in the 12 months to August.
Firms are under pressure to pay higher wages, even as business falters in some sectors. For example, manufacturing growth is at a two-year low, according to the latest S&P Global US Manufacturing PMI report.
Dan North, senior economist at global trade credit insurer Allianz Trade North America, says inflation-driven wage increases will also slow job growth.
“Employers will now be a little reluctant to offer a job and instead look to squeeze a little more productivity out of the employees they already have… just look at Google,” says North.
On Sept. 6, Google CEO Sundar Pichai said he wants to improve Google’s productivity efficiency by 20%, which means slowing the hiring rate and making better use of existing resources. Some interpreted his comments as a warning sign that layoffs were imminent.
While the tech industry has made headlines for laying off workers, it’s not the only one that will feel the effects of rising interest rates. Gould says the Fed’s aggressive monetary policy will hit various industries harder and sooner due to their sensitivity to interest rate fluctuations.
“Construction — commercial or residential — is going to take longer to slow down because those lead times are 5 to 6 months away,” Gould says. “We’re going to see a faster decline in things that people might get credit for because they’re anticipating much higher interest rates hitting their pockets now.”
If inflation continues to push consumers and unemployment starts to rise, retail and travel are likely to falter given their reliance on consumer spending.