In the wake of the Great Recession, the U.S. economy remained subdued for a prolonged period. Even swift action by the Federal Reserve in implementing quantitative easing couldn't drag the economy out of its sluggish post-crisis period.
Much was made of the record low interest rates, surging equity prices, and the speedy recovery in the housing market, but the impact QE had on the labor market is much less documented. Employment is a lagging economic indicator, meaning it typically is the last to recover after a significant recession. This is an examination of the relationship between quantitative easing and the labor market and the pros and cons of the Fed’s quantitative easing policy. (For more, see the tutorial: The Federal Reserve.)
Pros of Quantitative Easing
Most businesses, whether small or large, borrow money to expand and grow. During the post-Recession period of easy monetary policy, money became cheap as interest rates were slashed to zero, and didn't move higher until December 2015. These low rates allowed corporations to borrow money cheaply and expand their businesses and growth. As a result of increased investment, the U.S. job market began to improve. At its peak in December 2009, the unemployment rate hit 9.9 percent, by early 2017, it had more than halved to a decade-low of 4.4 percent.
Supporters of quantitative easing also pointed to the appreciation of riskier assets as a rising tide that lifts all boats. This increase in riskier assets (for example, stocks) resulted in an expanded labor force as greater wealth from capital gains and investment income promoted spending on goods and services. (For more, see: Quantitative Easing: Does It Work?)
Cons of Quantitative Easing
Quantitative easing skeptics argued that the Federal Reserve’s actions interfered with the normal marketplace pricing of bonds and other assets after the recession saying any perceived gains in the labor market or other indicators would be short-lived and will only last until another financial bubble. Furthermore, the extremely low rates, the recovery from this recession has taken longer than any prior recession in U.S. history.
While QE coincided with a fall in the unemployment rate, wage inflation stagnated for a prolonged period after the crisis. Even though general CPI was low, much was attributed to falling commodity prices. Many pundits cited that wages did not keep up with general household expenses. In addition, skeptics of the QE program on the labor market believed workers became underemployed: they were working below their skill level due to lack of availability of higher paying jobs.
Quantitative easing may exacerbate wealth inequality as well. In 2008, the financial system needed an injection of funds by the Fed to stave off a complete breakdown of the banking system. And it was judged a success because overall wealth increased, but it did not benefit the lower and middle class. QE widened the income gap, and as a result, when the stock market soared, wages stagnated and the only people that could take advantage were already wealthy.
The Bottom Line
There are pros and cons when it comes to the impact of quantitative easing on the labor market. Many people and corporations enjoyed robust recoveries in wealth and profits, after the QE program beginning in November 2008 leading to a sharp fall in the unemployment rate.
However, on the other side of the coin non-believers say the prolonged period of low inflation due to easy money was detrimental to the overall job market; real wages declined, the job market became inefficient, and the record low unemployment rate was misleading.
In 2017, the Fed announced it will begin reducing its $4.5 trillion balance sheet. This process, while slow, should over time give a better indication of the overall impact on the job market from quantitative easing.