2022

How Will Higher Interest Rates Impact the Labor Market?

Author: Liz Anderson
26 Jul 22

The Federal Reserve has signaled a second 0.75 percentage point interest rate hike is likely. The effects of rising interest rates are inescapable for consumers – and shifts in consumer demand will be felt acutely across the construction and manufacturing sectors in particular.

How Will Higher Interest Rates Impact the Labor Market?

The Fed’s ongoing fight against inflation will continue on July 27; they have signaled another large jump in their benchmark interest rate. Markets expect a hike of 75-basis-point (or 0.75 percentage points), the second in the last two months. The Fed’s challenge is to strike a balance between cooling the economy enough to curb inflation, but not so much as to cause a recession. 

One fundamental on their side in this battle is a strong labor market. The unemployment rate remains historically low, and high job openings continue to indicate the market is incredibly tight. However, the labor market – like the greater economy – cannot escape the fallout from interest rate hikes.

Some labor market sectors will be impacted more dramatically than others. Industries dependent on long-term financing and those that produce expensive durable goods are likely to adjust more quickly to dramatically higher interest rates. 

Construction

The average 30-year fixed mortgage rate has doubled over the last year, while home prices have hit record highs. Higher mortgage rates, all things equal, are likely to dampen home purchases; sure enough, new home sales are decreasing. If the housing market cools further, it would impact the labor market in construction particularly hard, as real estate investment drops with climbing rates. But so far, through May, job openings in construction have been trending higher and layoffs have declined.  

What impact will the Fed’s recent rate hikes ultimately have on the construction sector? The residential real estate industry employs a large share of construction workers. If homebuilding slows, expect the construction labor market to become less tight. Sustained demand for construction workers may be driven temporarily by public infrastructure projects and other non-residential investment in structures. But, ultimately, the residential market matters more. 

Manufacturing

Rising rates increase the cost of financing expensive, durable goods like cars and furniture, decreasing demand. Fluctuations in consumer demand for durable goods are felt acutely. This in turn impacts the demand for labor in the manufacturing sector. 

Following a spike in April, manufacturing job openings slipped in May. After further rate increases from the Fed – compounded with high inflation that drives consumers away from durable goods – this measure of demand for workers could drop further. 

A Tale of Two Sectors

Construction and manufacturing are not the only sectors vulnerable to interest rate hikes, but both sectors historically respond quicker than others to the Fed’s decisions. As the battle against inflation continues, employment dynamics in these sectors will fluctuate with higher rates, lower consumer confidence, and increased inflation. 

Companies will have to adjust their hiring plans as demand shifts, and these two sectors are geared to be among the first in which slack is introduced. 

Liz Anderson
Economics Writer

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