The US Labor Market Is Still in a Vulnerable Place

Last summer, in describing how a slowdown in the demand for workers was coinciding with a slowdown in the supply of workers, Federal Reserve Chair Jerome Powell coined a term: The US labor market, he said, was in “a curious kind of balance.” Today’s strong employment report, which showed the US adding 178,000 jobs in March and the unemployment rate falling to 4.3%, shows that this balance is holding — but the war in Iran threatens to upend it.

A recent research study presented at the Brookings Institution underscores the importance of labor supply for this current balance. Using a large set of labor market indicators and a statistical model, it identifies longer-run labor supply changes, such as those driven by immigration or aging, and short-run labor force changes, such as those driven by the business cycle. It argues that a slowdown in short-run labor supply was necessary for the soft landing, because the decline in labor demand since mid-2022 was of a magnitude comparable to that in prior recessions.