February 2023 Market Brief: Interest Rate Hikes Are a Tool Used to Weaken the Labor Market, But Is It Working?

By Maureen Mirabito | March 22, 2023

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All eyes are on interest rates. Prior to the collapse of Silicon Valley Bank, many who study the economy expected the Federal Reserve to implement another aggressive rate increase at their March 21-22 meeting given February's strong jobs report and stubborn inflationary pressures. Now, however, some think the Federal Reserve may proceed more cautiously to better assess the health of the financial system. Over the last year, the Feds have increased interest rates by 4.5 percent, the most rapid increase since the 1980's.

Why Interest Rates?

Interest rate hikes are the only tool the Fed can use to combat inflation, which is being driven by high demand and low supply (of goods, services, and workers). The theory is that interest rate hikes will pass through to the very tight labor market by reducing overall demand of goods and services and therefore business investments in growth and hiring. Unfortunately, it's a tool that works more like a sledgehammer than a scalpel, as we're witnessing impacts felt well beyond the labor market with the collapse of major banks.

Job Growth, Unemployment Rates, Labor Force Participation Rates, and Wages

Are the Hikes Working?

The US economy added 311,000 jobs in February, which is higher than economists expected and demonstrates just how strong the labor market remains despite the Feds efforts to weaken it. It's important to note the gains were largely concentrated in industries struggling to recover workers lost during the pandemic—leisure, hospitality, retail, and healthcare.

Two other metrics The Fed is paying close attention to are unemployment and labor force participation rates (LFPR). Increases in either of these metrics means there is a greater supply of available workers. In February, both metrics increased: Unemployment inched up slightly (3.6 percent) though remains very low, and labor force participation rates increased to their highest rate (62.5 percent) since the pandemic, which is a step in the right direction though there is still a long way to go in recovering enough workers to balance the demand for them.

Speaking of balance, we've been reporting on record wage increases for several months now. February's year-over-year increase occurred at a more rapid pace than last month's—4.6 percent in February compared to 4.4 percent in January. However, with inflation up 6 percent year-over-year in February, the wage increase feels like a "real earnings" loss of 1.3 percent, underscoring the imbalance that exists between inflation and opportunity right now: the increase workers receive in wages doesn't (and hasn't) covered what inflation takes back.

If you're interested in learning more about the nuance occurring, be sure to check out our recent article. In it, we outline three possible scenarios for the Feds inflation rate increase and its impact on the economy—a hard landing puts us in a recession to bring down inflation; a soft landing avoids a recession while also taming inflation; and a no-landing continues what we're already seeing—steady inflation, steady job growth, low unemployment, industry-specific layoffs, etc.

Job Openings, Job Quits, and Layoffs

If we learned anything during the pandemic and related supply-chain crisis, it's just how interconnected our economy is. Understanding what's happening at macro level is critical to identify patterns, anticipate trends, and prepare for industry-specific impacts. For example, higher interest rates have resulted in fewer people selling their homes, which has increased demand for new home construction.

However, we also learned how much nuance and variation exists with industries, particularly as it relates to job growth and labor supply. For example, an overall 3.6 percent unemployment rate is very low; but the unemployment rate for architecture and engineering is even lower at 1.6 percent. Companies looking to hire workers with these skill sets are competing for an extremely limited pool of candidates and may think twice about letting anyone go, even as other industries do.

Historical context also matters when looking at job reports from month to month. For example, while job openings are down across industries for February with 10.8 million openings, this still suggests greater demand than existed four years ago.

All that to say, companies that want to make the best decisions for their growth must also pay attention to the retention and engagement of employees who are critical to achieving that growth. Doing so requires a deep understanding of the data and its context at every angle and over time.

Job Openings

As mentioned, job openings declined slightly over the last three months (11.2 million in December versus 10.8 million in January) though still remain well above pre-pandemic levels. This could suggest a cooling labor market, but again, it's important to put that into context: a cooling labor market in 2023 is more like a racecar going from 200 mph to 180mph, rather than my grandparent's Buick going from 65 mph to 55 mph. Not to mention, December's original estimates were 11 million job openings, revised upward to 11.2 million.

Job Quits

For the first time in almost two years, job quits dropped below 4 million in January. This slight decline to 3.9 million could be attributed to several factors—growing economic fears, resignation fatigue, or even increased job satisfaction as companies improve retention and engagement practices. Considering the costly expense of high turnover and the burden of responsibilities offloaded to remaining employees, improved retention is hopefully good news for all.


As expected, layoffs ticked up slightly in January, particularly in professional and business services as companies prioritized initiatives and cut positions in finance and human resources. However, it's also interesting to note that even with these layoffs, this industry also reported net-positive job openings and hires, which indicates there is still work to do and perhaps these companies are prioritizing the most efficient way to get it done.

For an in-depth analysis of all engineering and sciences labor market data, download our industry data report.

Connecting the Dots

  1. Wage Transparency. Job site Indeed announced that pay transparency in job postings has more than doubled since 2020. Several states have recently enacted regulations requiring pay transparency, but there's been an increase even in states without such regulations. And, while there's a mix of low and high-wage positions among the sectors offering the greatest level of transparency, those offering the least amount tend to be the highest paying positions: engineering, banking, and finance. The reticence could impact the quality and quantity of job applications businesses receive: A recent survey by the Society of Human Resources indicates that four out of five workers are unlikely to apply for a job that doesn't provide a pay range.
  2. Women Boosting Labor Force Recovery. Women are returning to the workforce after having been hit hardest by pandemic-related disruptions: childcare, elderly care, etc. As this Wall Street Journal article points out, "Women have gained more jobs than men for four straight months." Increased options for remote work has also been identified as a possible contributor to the increase, as economist Nick Bloom and researchers explain in their research findings.
  3. If You Build It, Will They Come? Micron recently announced plans to build a $100 billion-dollar semiconductor manufacturing plant in upstate New York, one of several investments the US is making in reshoring efforts after dependence on far-away countries during COVID created significant economic challenges. The greatest obstacle facing the plan is the same obstacle facing companies worldwide: how will they find the talent to do the work? Engineering skillsets are scarce globally and finding them in an area that's experienced a 10 percent decline in population among 25-44 years old's the last twenty years further complicates the challenge. Business leaders, educational leaders, and workforce development organizations are in a huddle and a sprint to remake a workforce in the next couple of years. While this particular article's focus is on upstate New York and its unique challenges, the talent shortage is a national concern.

References: Actalent's February 2023 Economy and Labor Market Report synthesizes information from a variety of sources including the United States Bureau of Labor Statistics survey results, Lightcast (formerly Emsi-Burning Glass), media reports, industry intelligence, company earnings reports, and external labor market data. The full set of data and references are included as a companion to this article.

If you'd like more information on the data presented, or have questions about the information provided in this report, please contact our team at: content@actalentservices.com.

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