Report: "Factors Behind the Slowdown in U.S. Employment Indicators and Assessment of the Current Labor Market Situation"
U.S. Labor Market to "Moderate the Pace" of Employment Contraction
Unemployment Rate Expected to Rise Gradually
The Bank of Korea has forecast that the U.S. labor market will mitigate the impact of reduced labor supply in the future, thereby moderating the pace of employment contraction. The unemployment rate is projected to rise at a gradual pace through the first half of next year, as economic growth continues to weaken.
Recently, concerns about a slowdown in the U.S. labor market have been mounting, primarily due to a significant deceleration in employment growth. The monthly increase in nonfarm payrolls has dropped from an average of 168,000 last year to 111,000 in the first quarter of this year, and further down to just 27,000 between May and August. As downside risks to employment have grown, the Federal Reserve cut its policy rate last month for the first time in nine months.
According to the Bank of Korea's report released on the 24th, titled "Factors Behind the Slowdown in U.S. Employment Indicators and Assessment of Current Labor Market Conditions" (by Jung Heewan, Lee Nayoung, and Lee Seungmin), there are diverging views on the causes of this employment slowdown. Some attribute it to weakened labor demand resulting from tariff policies, warning that labor market conditions could deteriorate rapidly. Others argue that the reduction in labor supply, particularly due to decreased immigration, has played a larger role, and maintain that the labor market remains fundamentally robust.
Jung Heewan, Head of the U.S. and Europe Economic Team at the Bank of Korea's Economic Research Department, explained, "Our analysis estimates that about 45% of the total employment decline this year can be attributed to reduced labor supply resulting from decreased immigration (a structural decline and restrictive immigration policies). Tariff policies accounted for 40%, while federal government workforce reductions contributed around 8%." This largely aligns with Federal Reserve Chair Jerome Powell's recent assessment that declining immigration has had the greatest impact on the recent employment slowdown.
Based on these findings, the Bank of Korea provided the following diagnosis of the current U.S. labor market: ▲ While the capacity of firms to absorb new employees has recently weakened, ▲ overall labor market supply and demand conditions remain favorable, and ▲ the likelihood of a sudden and severe employment recession is low.
Looking ahead, the U.S. labor market is expected to see a moderation in the recent sharp slowdown in employment, with the unemployment rate rising only gradually. Jung noted, "From the perspective of labor supply, the rapid decline seen so far is likely to ease somewhat. Considering that under the Trump administration's first-term immigration restrictions, net monthly immigration remained at 50,000 to 60,000 between 2017 and 2019 (excluding the COVID-19 period), and that the current figure has dropped to the 60,000 range, the possibility of a further sharp decline in immigrant labor is not high." He also pointed to administrative limitations at immigration courts and agencies as factors supporting this assessment.
On the demand side, as economic growth gradually weakens and existing policies such as tariff measures and federal workforce reductions continue, the slowdown in labor demand is expected to persist for the time being. Jung explained, "While uncertainty surrounding tariff policies and pressure on corporate profit margins will gradually ease, going forward, the weakening of domestic demand due to rising prices is likely to emerge as a secondary effect impacting employment." The U.S. government's plan to reduce the federal workforce by 300,000 by the end of this year, with an additional 100,000 cuts in the non-defense sector by next year, is also expected to exert downward pressure on labor demand.
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