The pandemic left the U.S. labor market badly overheated. Reopening businesses panicked at labor shortages, paying big raises to hire. As prices shot higher, fears rose of a wage-price spiral.
Recently, though, the labor market has cooled, and indeed, looks like something close to normal. Unemployment has crept up from a half-century low of 3.4% a year ago to 4% in May, consistent with what economists consider full employment. The Labor Department releases June data Friday.
The question now is whether the labor market is in a sustainable equilibrium where unemployment settles out around 4% or keeps softening, resulting in recession—as historically has occurred when unemployment rises much more than it already has.
“This is what the economy looks like when it is at a sustainable simmer,” said Ernie Tedeschi, a former Biden administration economist who is now at Yale University’s Budget Lab. “But because we spend very little time in our economic history close to or at full employment, there is a lot more uncertainty.”
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