Economist analyzes labor market, debt ceiling, interest rate debates

University of Arkansas Walton College economist Mervin Jebaraj has a lot of history to rely on when examining current economic conditions.

Arkansas and the U.S. are experiencing record low unemployment rates in the midst of a debt ceiling debate and interest rate hikes to tame inflation.

Jebaraj said the state’s 3.0% unemployment rate makes this a healthy labor market for workers and extremely difficult for employers. That difference in perspective is leading to mixed views on the strength of the economy.

“I think it [3.0% unemployment] indicates a very healthy labor market, at least for workers,” he said. “With such a tight labor market, as many people working and the unemployment rate as low as it is, when employers want to go out and find people to work, it’s a lot harder to get people to work for you.

“Employers obviously have to raise wages significantly to be able to hire workers, and offer other benefits that they typically do not offer or have not offered. So I think what you’re hearing in the public is often workers themselves are doing better than they have in the last year and the year before, but what you’re hearing constantly is – especially from smaller businesses – employers saying that they’re having a hard time hiring workers, and that colors their view of economic conditions,” he added.

Jebaraj said the looming debt ceiling debate in Congress and the likely brinksmanship negotiations that will take place may look like a movie sequel to previous federal debt ceiling showdowns.

“I think what we’ve seen the last time this happened is an increase in borrowing costs. So borrowing costs for the federal government have already gone up last year. That’s going to increase even more, which means that we’re going to be paying more as taxpayers because of running up against this debt ceiling increase,” he said.

“Last time, we saw an immediate decrease in consumer and business confidence. So consumers are going to pull back, businesses are going to pull back because of uncertainty, and there will be immediate declines in the stock market as well,” Jebaraj said.

This past week, the Federal Reserve Bank raised key interest rates another quarter point – its tenth interest rate increase in just a little over a year – in its effort to tame inflation. Jebaraj said the Fed is likely trying to learn from mistakes of the past, even at risk of pushing too hard with interest rate hikes.

“A lot of them [Fed members] came of age or were studying economics or working during the ’70s and early ’80s. And what they remember is the mistakes that the Federal Reserve made in the ’70s, where every time the inflation rates started cooling, they pulled back, reducing interest rates, and then inflation would kick back up, and they had to raise rates again,” he said.

You can watch Jebaraj’s full interview in the video below.