Kitchen Table Economics

What is a Tight Labor Market?

The economy has been booming for the better part of a year now—which has led many economists in the media to discuss the so-called “tightening of the labor market.” But what exactly is a “tight labor market?”

The marathon of economic advancement—kicked-off by the passage of the Tax Cuts and Jobs Act in 2017—has induced record low unemployment rates, sky-high consumer confidence, soaring small business optimism, and through-the-roof job creation. All elements that have led to a situation where job creation has outpaced the number of available workers.

While, traditionally, American workers have competed for a limited number of available employment opportunities, the shoe is now on the other foot. Instead, employers are having to compete for a shrinking number of Americans who are seeking work—a circumstance that pushes employers to outbid one-another by offering better benefit packages, higher wages and even more desirable working conditions to job candidates.

So instead of economic advancement unfolding in monthly job creation numbers—a metric usually considered the “gold standard”—progress is seen through accelerated wage increases. These changes are already being highlighted in monthly reports from the Bureau of Labor Statistics.

But what does this mean for the average American worker?

For starters, it means job opportunities are abundant. If someone is seeking employment, it’s very likely they will find it. And for those already under the employ of a business, their bargaining power increases substantially and the probability of negotiating a raise goes up.

A tight labor market will inevitably alter the dynamics of the U.S. economy—shifting measured economic progress from one indicator to another. Persistently strong job creation cannot continue indefinitely, but that doesn’t mean future economic advancement will be halted.