New Cleveland Fed research: Rising interest rates helped ease labor market tightness

Interest rates went up, then the job market started to cool down – but did rising rates actually help cause that change?

The answer appears to be at least a partial “yes,” according to a new report from the Federal Reserve Bank of Cleveland.

The Federal Open Market Committee started raising the federal funds rate in March 2022 to fight inflation, and one of its stated goals was to restore balance to the labor market.

Since then, the number of open jobs, which had been rising, has started to decline, bringing demand more in line with the supply of labor. Higher interest rates appear to have contributed to that drop, according to researchers Adiah Bailey and Victor Hernandez Martinez.

In “The Effect of Higher Financing Costs on Job Openings and Online Job Postings,” they describe how some industries and states are more sensitive to interest rate increases than others. Those industries and states have tended to see bigger declines in job openings since rates started rising.

“The results for both suggest that monetary policy tightening is already having a measurable impact on the labor market,” Bailey and Hernandez Martinez wrote. More research would be needed to determine the size of that impact, they added, citing the limitations of the available data and strong assumptions in their analysis.

Read the Economic Commentary:
https://www.clevelandfed.org/publications/economic-commentary/2023/ec-202309-effect-higher-financing-costs-job-openings