Flood of Workers Has Made the Fed’s Job Less Painful. Can It Persist?

Hotels in New York’s Adirondack Mountains are having an easier time hiring this summer, partly as immigrants enter the country in greater numbers and provide a steady supply of seasonal help that was hard to come by in and just after the pandemic.

It is making staffing less stressful for companies like Weekender, a brand that includes seven rustic hotels in and around the region. The company has managed to get six cultural exchange workers this summer, up from four last year. And similar stories are playing out across the country, offering good news for the Federal Reserve.

Fed officials are trying to wrestle inflation down by raising interest rates and slowing the economy. A big part of the task hinges on restoring balance to the labor market, which for 23 straight months had notably more jobs available than workers to fill them. Officials worry that if competition for workers remains fierce and wages continue to rise as quickly as they have been, it will be hard to fully stamp out fast price increases. Companies that are paying up to lure workers will try to charge more to cover their climbing labor bills.

The Fed can help to cool the labor market by lowering demand, but the central bank has been getting more help than expected from a growing supply of workers. In recent months, workers have piled into the labor market in numbers that have surprised policymakers and many economists.

The development is owed partly to a rebound in immigration that has come as the United States has eased pandemic-related restrictions, cleared processing backlogs and enacted more permissive policies. Labor supply has also received a boost as some demographic groups — including women in their prime working years — have returned to the job market in bigger numbers than anticipated, pushing their employment rates to record highs.

That influx has made the Fed’s job a little less painful. Hiring has been able to chug along at a solid clip without further overheating the labor market because workers are becoming available to replace those who are getting snapped up. Unemployment has held steady around 3.5 percent, and some data even suggests that staffing is becoming less strained. Wage growth has begun to slow, for instance, and workers are no longer pulling such long hours.

“Monetary policy is part of the story to get demand moving towards supply, but any help we can get from supply increasing, that’s good news,” John C. Williams, the president of the Federal Reserve Bank of New York, said in an interview with The Financial Times this month.

Employers have added about 280,000 workers per month so far in 2023. Job gains have been gradually slowing, but that is nearly triple the 100,000 pace that Jerome H. Powell, the Fed chair, suggested he expected would be necessary to provide jobs for a steadily growing population.

The expanding supply of workers has allowed the Fed to accept the faster-than-expected hiring without slamming the brakes on the economy even more aggressively. Fed officials, who have raised interest rates above 5 percent from near zero in March 2022, have nudged them up more and more slowly over recent months. Policymakers are expected to raise rates by a quarter-point at their meeting this week, to a range of 5.25 to 5.5 percent. Many investors are betting the decision, which will be announced on Wednesday, could be the Fed’s final move for now.

What the Fed does in the remainder of 2023 will depend on economic data. Does inflation, which slowed considerably from its peak in June 2022, continue to moderate? Do job gains and wage growth continue to drift lower? If the economy keeps a lot of momentum, officials might feel the need to make another move this year. If it cools, they might feel comfortable stopping rate increases. In either case, policymakers have been signaling that rates will probably need to remain high for some time.

When it comes to the labor market part of that puzzle, key officials have signaled that they think the next phase of restoring balance could be the more difficult one. Policymakers have welcomed newfound labor supply in recent months, but some doubt the trend can continue. Mr. Williams suggested that immigration could remain strong, but that it may be difficult for participation — the share of who are working or looking — to climb much higher.

“I don’t think there is a lot of space for that to continue to be a big driver of the rebalancing of supply and demand,” Mr. Williams said in his July interview — explaining that the Fed will need to keep using policy to slow labor demand in order to lower inflation.

Some economists and labor groups think officials like Mr. Williams are being overly glum about the prospects for continued improvement in labor supply: Immigration numbers are still climbing, and flexible and remote work arrangements might mean that people who could not work in eras past now can.

“That ability for the labor supply side to continue to improve, I think the Fed has probably undersold it,” said Skanda Amarnath, executive director at Employ America, a research and advocacy group focused on the job market. “I think they’re probably underselling it even now.”

Worker shortages began to bite in late 2020, after deep layoffs and curbs on immigration shrunk the size of the labor pool. The civilian labor force — which included people who are working or looking for work — plummeted by eight million people in early 2020.

But the supply of workers has since rebounded by about 10.6 million people. That recovery has owed partly to a pickup in the foreign-born labor force, which has accounted for roughly one in every three potential workers added since the pandemic low point, based on Labor Department data.

Legal immigration has been gaining steam as processing backlogs clear and Biden administration policies allow more refugees into the country, said Julia Gelatt, associate director of the U.S. Immigration Policy Program at the Migration Policy Institute. Undocumented immigration has also been notable, increased by political turmoil abroad and the draw of a comparatively strong and stable American economy.

“We are seeing a sizable increase in immigration,” Ms. Gelatt said. “Certainly a rebound to the pre-Trump, prepandemic normal.”

The recovery in documented immigration is clear in visa data. About 1.7 million workers may enter the country this year if current trends continue, about 950,000 more than at the low point during the pandemic, Courtney Shupert, an economist at MacroPolicy Perspectives, found in an analysis.

In fact, immigration may be even stronger than before the pandemic, when policies by former President Donald J. Trump reduced the number of foreigners entering the United States. The number of potential workers coming into the country on visas in May alone stood at about 50,000 more than was normal from 2017 to 2019, she found.

Immigration is not the only potential source of new labor supply. Employment rates have been climbing across the board, with the share of disabled people and women between the ages of 25 to 54 who work reaching new highs, possibly bolstered by a shift to more remote work and more flexible hours that took place amid the pandemic.

“It’s given us a supply of workers we haven’t had before, because workplaces are more flexible,” said Diane Swonk, chief economist at KPMG.

The end result has been helpful for businesses like the Weekender hotels in the Adirondacks. The firm’s six cultural-exchange visa workers are spread across three of its seven properties, said Keir Weimer, the founder of the company, and are a small but important chunk of its 85-person work force.

The company has also been having an easier time competing for employees in general after a few years of adaptation. Mr. Weimer estimated that pay was up 10 to 15 percent over the past 15 months, but said that wage growth was beginning to cool.

“We’re starting to now get more defined on career-track progression and having wages tied to performance and promotion, rather than just market,” he said. “There’s definitely less wage pressure than there was a year ago.”

Of course, new labor supply can also bolster demand: As more people work, they earn money and spend it, said Jason Furman, an economist at Harvard, counteracting any drag on inflation. That does not mean that improving labor supply is not helpful.

“It is a way to have a higher pace of job growth without inflationary pressure,” he said.

But even as employers and economists embrace a slowly normalizing labor market, the supply of workers faces a big headwind: an aging population. America is graying as baby boomers, a big generation, move into their retirement years, and older people are much less likely to work.

That is why some officials at the Fed doubt that climbing labor supply can do a lot of the heavy lifting when it comes to rebalancing the labor market — a skepticism some economists share.

“I think we will have a lack of supply, still,” said Yelena Shulyatyeva, senior economist at BNP Paribas.