Labor Day is upon us, and it’s a good time to take stock of how things are going for American workers. Things are unequivocally going great. The job market is red hot, and although it is sure to cool in coming months, prospects are that workers will hold the better hand in negotiations with their employers for years to come.

Recent job market statistics are impressive. The economy created well over half a million jobs last month, with employment fully recovering from the stunning 22 million jobs lost during the severe recession that hit when the COVID-19 pandemic shut down the economy more than two years ago.

Employment isn’t all the way back in some industries, such as travel and K-12 schools, but employment is back and then some in such industries as construction and professional services. Employment is up strongly everywhere, although big cities such as Philadelphia have been slower to rebound as remote work empowered workers to move to the suburbs, exurbs and rural areas.

Unemployment has steadily declined and is now back to its pre-pandemic low of 3.5%. And unemployment is down significantly for men and women across all age groups and for people of color. At the height of the pandemic shutdowns, one-sixth of the workforce was unemployed.

Workers currently enjoy an extraordinary edge. There are well more than 10 million open job positions. Historically, something closer to seven million would be considered really good. Plum job opportunities are plentiful in most industries and nearly every community, and workers have been taking advantage, quitting lesser jobs at a record pace.

Reasons for caution

To be sure, the job market has blemishes. First, while wage growth has picked up with the falling unemployment, it hasn’t kept pace with the runaway inflation of the past year. But this is set to change. Oil prices, which surged with Russia’s invasion of Ukraine, to become the principal cause of the high inflation have receded recently. If sustained, which seems likely, wage growth will soon outpace inflation again.

The other issue is that the job market is arguably too tight. That is, with so many jobs going unfilled, businesses are unable to meet the strong demand for their goods and services. Restaurants can’t find servers and thus can’t open; airlines unable to find pilots are canceling flights; and builders can’t find carpenters and electricians, so a record number of new homes remain unfinished.

It’s been tough to get people back to work. Millions continue to get sick with the virus, and many others are struggling with long-COVID, which makes it impossible for them to be on the job, at least for as many hours as before. Others are still nervous about bringing the virus home to their elderly parents or young unvaccinated children. Child care also remains a big impediment for parents wanting to return to work.

The other big problem is the collapse in foreign immigration. More restrictive immigration rules and the pandemic have caused legal immigration to fall from about one million a year under President Barack Obama to about one-fourth that last year. Immigrants fill many of the jobs in those industries most pressed to find workers: agriculture, construction, leisure and hospitality, restaurants, and recreational activities.

What this means for interest rates

The robust job growth, quickly falling unemployment, and tight job market are a big reason that the Federal Reserve is aggressively increasing interest rates. The Fed is concerned, with reason, that a dreaded wage-price spiral will take hold. That happens when higher inflation begets higher wages as employees demand to be compensated for their higher cost of living, which, in turn, begets higher inflation as employers jack up prices for their goods and services to compensate for the higher wages they are paying.

This is not sustainable, and the Fed will likely continue to hike interest rates until the job market significantly cools, and the wage-price spiral is short-circuited. This requires that monthly job gains slow to no more than 100,000 per month, the number consistent with stable unemployment. That’s a big comedown from the current job gains and will feel uncomfortable.

There is also no guarantee the Fed can calibrate its interest rate hikes so that job growth gracefully slows but doesn’t tank and lead the economy into recession. That would mean surging layoffs and quickly rising unemployment. The Fed has a good chance of getting its rate increases just right, but recession risks are high.

Regardless of whether the economy is able to navigate the next year or two without suffering a downturn, the next couple of decades should be good ones for workers. With the large Baby Boomer generation fast retiring from the workforce and legal immigration likely to remain a shadow of what it was, employers will generally struggle to fill positions. American workers should enjoy many good Labor Days in coming years.

Mark Zandi is chief economist for Moody’s Analytics.