Job markets are defying central bankers’ efforts to cool demand

Published Sun, Oct 30, 2022 · 06:18 PM

Robust labour markets are defying central bankers’ efforts to tamp down inflation and economists’ predictions that recession is just around the corner.

The strong job market is good for workers. But it’s bad for inflation, signalling to the world’s central banks, which are raising interest rates at the most aggressive pace in decades, that they can’t ease up.

As borrowing costs surge and growth slows, unemployment rates are not rising. Instead, companies across developed economies are complaining of chronic worker shortages. A persistent mismatch between demand for new hires and the supply of workers is supporting wages and shielding consumers from slowdowns just when central banks need fading demand to cool inflation. 

As at September, employment across manufacturers and service providers globally had climbed each month for the last two years, according to a JPMorgan Chase gauge produced by S&P Global. And the Organisation for Economic Co-operation and Development (OECD) said unemployment in its 38 member nations reached 4.9 per cent in August. The rate was below or equal to the pre-pandemic level in 80 per cent of the countries.  

“You do see broad-based strength in labour markets,” said Joseph Lupton, global economist at JPMorgan. “Strong job growth is absolutely the central support for the consumer.”

In the US, the unemployment rate is at 3.5 per cent, matching a five-decade low. Employer demand for workers is strong, yet labour-force participation remains below pre-pandemic levels, with 1.7 job vacancies for every unemployed American. 


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Data out on Oct 28 showed US employment costs continued to rise at a brisk pace in the third quarter, highlighting the persistence of inflationary pressures that are likely to keep the Federal Reserve on a course of steep interest rate hikes. The US central bank is predicted to deliver its fourth straight rate increase of 75 basis points this week.

US consumer demand rebounded as Covid-19 lockdowns and restrictions eased, bolstering companies’ need for labour. The pandemic had led to many people leaving the workforce while also disrupting the normal flow of immigrant labour. The combination of higher demand and lower supply “propelled us pretty rapidly to a tight labour market”, said Julia Coronado, president of MacroPolicy Perspectives.

Policymakers will be sifting through Friday’s (Nov 4) jobs report for any signs of softening. The data is likely to show employers continued to add jobs at a solid, albeit more moderate, pace in October. 

In the euro area, unemployment is at the lowest point in the common currency’s 20-year history. Large industrial economies including Australia, Canada and South Korea are also seeing tight labour markets despite rising interest rates. 

When and if job growth starts to crack will help determine when central banks can slow or even stop raising rates. So long as hiring remains resilient, they may be reluctant to ease up. 

A scenario where inflation comes down and unemployment rises only modestly would be the best case for central banks globally. The Fed optimistically predicts US unemployment will rise in the coming year to 4.4 per cent and hold there.

It’s unclear, however, if policymakers can achieve their inflation goals without driving up joblessness, given the role that widespread employment and swift wage gains have played in supporting consumer demand. 

Such soft landings are rare. In 1994-1995, under then-chair Alan Greenspan, the Fed doubled interest rates to 6 per cent and succeeded in slowing economic growth without killing it off or fuelling unemployment. But during periods of high inflation in the 1970s and 1980s, Fed tightening led to unemployment rates surging to 9 per cent in 1975 and 10.8 per cent in 1982.

In the US, Bloomberg Economics estimates it would take net job losses of about 35,000 per month – for a year – to bring inflation back to the Fed’s 2 per cent target, and even more if price pressures have grown entrenched. 

It’s possible that higher rates are still percolating in the economy and eventually will lead to mass layoffs. “Unemployment data are lagging indicators so we will see the impact much later,” said Sayuri Shirai, a former Bank of Japan board member who’s now a Keio University professor. “Perhaps we might see the impact of monetary policy somewhat later towards the end of this year,” she said.

Right now, layoffs are still hovering at historically low levels, but leading brands in global commerce are starting to signal a slowdown is coming. 

Meta Platforms, the owner of Facebook and Instagram, said it will freeze hiring and restructure some teams in an effort to cut costs and shift priorities. Goldman Sachs Group has embarked on its biggest round of job cuts since the start of the pandemic. 

Still, employers are hiring, wages are rising, and layoffs remain scarce. 

In the UK, the lowest jobless rate since 1974 masks a labour force participation problem, with at least 300,000 fewer people employed than before the pandemic. One example: London’s Heathrow Airport has flagged that it needs to hire an additional 25,000 people.

In the US, applications for unemployment insurance are near historically low levels. Nearly half of small businesses are reporting they can’t fill open positions. 

Although there is some indication that labour demand has moderated, “there remains a lot of wood to chop to get labour demand and supply back into balance”, said Sarah House, a senior economist at Wells Fargo. Her team isn’t expecting the US economy to slip into recession until the second quarter of next year “in part because there is still such overall strong demand for labour”.

Reserve Bank of Australia Governor Philip Lowe told lawmakers in September that the outlook for the labor market there is “as strong as it has been in decades”.

Soaring inflation will hammer salary increases for the second year running in 2023, according to a survey by workforce consultancy ECA International. Just 37 per cent of countries globally are expected to report wage hikes that keep up with inflation. That likely means workers will be pushing higher wage demands, which would further stoke inflation and encourage central banks to tighten even more.

In New Zealand, whose central bank was among the earliest and most aggressive of developed economies to hike rates, wage inflation is the fastest in 14 years and there is a scarcity of foreign workers in key industries. 

It’s possible that companies are choosing not to cut staff that they might not be able to hire back quickly once the recovery begins. That may mean the hit to employment may not materialise for some time, said Robert Carnell, chief economist for Asia Pacific at ING Bank. 

“There is an argument for labour hoarding that may keep labour markets tight,” he said. The slack that central banks want to see before lowering rates isn’t yet evident, and may not be “for quite a long time”.  BLOOMBERG



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