Boom! Where did all the jobs go?
Amid the unexpectedly early victory of Donald Trump, economic discussions have fixated on the bond market sell-off driven by inflation fears—a topic we've already explored this week. However, beneath these immediate reactions lies a more nuanced issue: the underlying dynamics of the US labour market. This is an area where Trump's policies could have counter-intuitive consequences, particularly when considering the powerful demographic forces at play. While we'll delve deeper into these policy implications in our upcoming daily analyses, for now, let's focus on the evolving landscape of jobs.
In the US labour market, a seeming paradox is unfolding. Job growth has slowed significantly, with recent months showing stagnation across key sectors. Yet, despite this weakness, the unemployment rate remains low, even ticking down in recent reports. This contradiction challenges the traditional view that weak job growth typically leads to rising unemployment, suggesting instead that powerful demographic forces are at play.
At first glance, low and falling unemployment might seem to signal a robust economy. Yet beneath the surface, the story is more complex. The baby boom generation, the largest in US history, is reaching retirement age and leaving the workforce in large numbers. This demographic shift shrinks the pool of available workers, allowing the unemployment rate to decline even if job creation is sluggish. The result is a potentially misleading impression of labour market health, masking economic weaknesses caused by slow job growth and an ageing workforce.
This dynamic presents a unique challenge for the Federal Reserve, particularly for Chairman Jerome Powell, as it complicates the Fed’s approach to managing economic cycles. Traditionally, the Fed would respond to weak job growth by lowering interest rates to encourage hiring and prevent rising unemployment. But today, with unemployment falling despite limited job creation, the Fed’s response is less straightforward. How does Powell justify potential easing when the headline unemployment rate remains low? Easing policy to address labour market strain could risk confusing a public that still sees low unemployment as a sign of strength.
A preview of where this could lead can be seen in Japan. For decades, Japan’s ageing population has kept unemployment persistently low, but at the cost of economic dynamism. With fewer young workers replacing retirees, Japan faces both labour shortages and sluggish growth—a potential roadmap for the US if demographic shifts continue without intervention. Japan’s experience serves as a cautionary tale, showing how an ageing population can lead to stagnation despite low unemployment.
Before the pandemic, ageing populations were widely understood to correlate with lower growth and reduced interest rates—a reality that largely still holds. Yet, post-pandemic, G7 governments have struggled to bring spending to sustainable levels, leaving debt burdens high and rising rapidly. This reality suggests that, despite the rise in interest rates over the last few years, a return to zero rates may be inevitable in the longer term. High debt and ongoing fiscal demands make it increasingly challenging to sustain growth, especially as the working-age population declines.
The endgame appears to be an environment where fiscal and monetary policy must adapt to support economic stability in the face of slower growth and persistent imbalances. For the Fed, this means acknowledging that today’s low unemployment rate is no longer a straightforward indicator of health and adjusting policy with an eye toward the long-term impact of an ageing workforce. The great unknown, complicating matters for the Fed, is whether future administrations will address these demographic realities proactively.
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