capitalism

The Reserve Army of Labor and How Central Banks Shape the Job Market

How interest rates shape unemployment, worker power, and job security, and why Fed policy decisions affect families far beyond the banking system.

T Jackson

22 Nov 2025 — 3 min read

unsplash.com/@gettyimages

Abstract

How interest rates shape unemployment, worker power, and job security, and why Fed policy decisions affect families far beyond the banking system.

In the United States, the Federal Reserve—often called "the Fed"—plays a role in shaping the job market. The Fed does not directly hire or fire workers, but its decisions strongly affect the number of jobs available. The primary tool the Fed uses is the interest rate. This is the rate that affects how expensive it is for banks, businesses, and regular people to borrow money. The wording that the Fed uses is “the Fed's legal goal is to stabilize prices and employment".

When the Fed raises interest rates, so does the cost of borrowing. That means fewer businesses take out loans to expand, fewer people buy homes and cars, and overall spending slows down. When the economy slows, unemployment usually rises. This is not an accident. It is part of the Fed's efforts to influence the Reserve Army of Labor.

Some critics say that this system creates what they call a "reserve army of labor." This phrase means a group of people who are unemployed or fear losing their jobs. When unemployment rises, workers have less bargaining power. Employers do not have to raise wages, improve benefits, or offer better working conditions because people are afraid of losing their jobs. In short, when unemployment is higher, workers often feel forced to accept whatever is offered. The Fed uses the term "labor market overheating".

The Fed has often said that an unemployment rate of around 4% to 4.5% is considered "stable." But even 4% unemployment means more than one out of every 25 workers who want a job cannot find one. And that number does not count stay-at-home parents, disabled people, people who gave up looking, or workers stuck with part-time hours who want full-time work. When you include those groups, the number of people struggling in the labor market is much higher.

When the Federal Reserve raises interest rates, many experts get worried. They argue this move will cause people to lose their jobs, have their hours cut, or get smaller benefits. For families, this isn't just a theory—it's a real problem. If a parent loses a job, the bills start to pile up fast. It's no surprise that people get angry when a decision made in a faraway office can hurt their family's livelihood.

A Different Approach to Interest Rates:

Many economists believe we should keep interest rates low. Their goal is to keep the unemployment rate very low—under 2%.

When almost everyone who wants a job has one, workers have more power. Companies suddenly have to compete to find and keep good employees.

To do this, they often have to offer higher pay, improved benefits, and safer working conditions. This situation can also help fight discrimination. When jobs are plentiful, businesses can't afford to overlook qualified people just because of their background.

When people feel secure in their jobs, they usually spend more money. They buy groceries, fix cars, take vacations, and invest in their homes. This extra spending helps the entire economy grow. A strong job market also pushes companies to train their employees, making the workforce more skilled over time.

Why It Matters

The way interest rates and unemployment are managed significantly affects hourly, commissioned, and salaried workers. It shapes pay, job security, and family stability. Understanding how these systems work helps you see why economic decisions matter—and why it is fair for workers to understand the systems that impact their lives.