How Quantitative Easing Affects the Labor Market

By Stephan Abraham

After several years of negative and sluggish growth, the United States has begun to slowly emerge from the Great Recession. One of the most prominent tools the Federal Reserve Bank used to combat the economic downturn is quantitative easing. Also called QE, quantitative easing is when the government purchases debt in the open market to increase demand for those assets, thereby causing their prices to increase.

Given the inverse relationship between bond prices and interest rates, mortgage and interest rates have since plummeted to unprecedented levels. First-time homebuyers and those who want to refinance their homes have clearly benefited from the low rates. Investors with stocks are also reaping rewards, watching their portfolios double from the depths of the most recent bear market. Stocks are a more attractive investment in this economic climate because a certificate of deposit or money market account gets near zero percent return.

As a result of the slow but steady economic recovery, the Federal Reserve recently decided to end its quantitative easing program. While the policy’s effect on interest rates and the like is well documented, its impact on the labor market is less evident. Employment is a lagging economic indicator typically, so it’s usually 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.

Pros of Quantitative Easing 

Most businesses, whether small or large, will need to borrow money to expand and grow. During periods of government-supported bond buying, money becomes a very inexpensive asset. Interest rates during the Great Recession were near zero percent and still remain historically low. These low rates allow corporations to borrow money cheaply and expand their businesses, promoting, in theory, risk taking and expansion. As a result of increased investment – and a presumably good return on that investment – these corporations will need to hire and expand their workforce.

Supporters of quantitative easing will also point to the appreciation of riskier assets as a rising tide that lifts all boats. This increase in riskier assets (for example, stocks) is likely to result in an expanded labor force as greater wealth from capital gains and investment income spur spending on goods and services. As this money is spent, it works its way through the economy and has a multiplier effect, resulting in positive gross domestic product, or GDP, growth.  Eventually the higher spending and investment lead businesses to create more jobs in an attempt to keep up with the demand for their offerings.

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