Challenges Facing the US Labor Market: A Deeper Look

Julia Coronado, founder and president of MacroPolicy Perspectives, warned in a Financial Times column about the continuing challenges facing the US labor market. This warning comes at a time when the global economy is experiencing significant fluctuations, and markets are affected by internal and external policies.

In its recent decision to cut interest rates, the Federal Reserve referred to potential "downside risks" in the labor market. These concerns are not new; they are the result of several interconnected factors.

Impact of Trade Policies and Immigration

Trade policies, particularly the trade war that imposed significant tariffs on imports, have had clear effects on the labor market. Companies find it difficult to pass on rising costs to consumers, leading them to adopt a "cautious hiring" policy to reduce pressure on profit margins. The value of tariffs paid by US importers reaches $350 billion annually, a substantial amount that negatively affects the economy.

In addition, immigration restrictions have slowed the growth of the labor supply, contributing to the apparent stability of the unemployment rate. However, this stability hides the fact that the economy is growing at a slower pace due to a shortage of available labor.

Government Spending Cuts

Government spending cuts, whether at the federal or local level, are leading to layoffs in the government, health, and education sectors. These cuts, which face legal challenges, are already showing their negative effects on the labor market.

Towards a Gloomy Outlook

Estimates indicate that the education sector may see the layoff of more than 200,000 employees this fall due to spending cuts. The end of voluntary redundancy compensation programs in the federal government will also lead to tens of thousands losing their jobs. In addition, immigration raids are creating a state of fear among workers, negatively affecting sectors such as agriculture and construction.

The Stock Market Paradox

Despite these challenges, the stock market has seen a notable recovery since April. This may be due to tax cuts and interest rate cuts that mitigate the negative effects of other policies. However, we must keep in mind that two-thirds of US economic growth depends on consumer spending. If companies continue to reduce hiring to protect profit margins, optimistic forecasts for corporate earnings may not materialize.

Conclusion

The US labor market faces significant challenges that require radical treatment. Policymakers must consider the negative impacts of trade policies, immigration, and government spending cuts on economic growth and employment.