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If there is one aspect of the economy that is rarely the focus of forecasters, it is the labour market. It is often considered a lagging indicator for growth and with statistics published infrequently and well after the event, it is the poor relative in the forecasting world. This could change in the coming months. Employment may well be the next driver of overheating inflation, causing a new flare up of inflationary fever, and, worse still, acting as the catalyst for a self-perpetuating spiral of pricing pressure that generates wage rises, which in turn put pressure on consumer prices, and so on.
Today, the employment market is becoming extremely tight in all of the major developed economies. For example, figures published by the US Bureau of Labor Statistics put the unemployment rate at 3.6% in March, within a hair’s breadth of dropping below its pre-pandemic level of 3.5%, itself a record since the 1960s. At these levels, the labour market is therefore both at full employment and under pressure. For in just two years, the healthcare crisis has ushered in major changes – increased digitisation and a major wave of resignations – the demand side for work has evolved rapidly, whilst the supply side, less flexible by nature, has tended to prove fickle or, at the very least, more demanding.
One example is particularly striking: the US retailing giant, Walmart, is today offering up to USD 110,000 to recruit heavy goods vehicle drivers – the type of salary a young graduate aspires to! In Europe too, even though full employment looks to be further off, the employment market is getting tighter with every passing quarter. The unemployment rate today is 6.8%, its lowest level since the calculation of Eurostat statistics (1998). As far as the member states are concerned, it is often the countries with the highest inflation that have the lowest unemployment rates: Germany, Hungary, Poland, etc.
The same is true at the microeconomic level. For example, the head of global temporary employment agency ManpowerGroup has spoken in recent days of “such a global talent shortage”.
And these economic tensions are being exacerbated by the economic catalyst of demographics. In countries with ageing populations, baby boomers are gradually retiring and there is no way to fully replace them on the employment market.
What will the consequences be?
For employees, this is – in theory – favourable as it shifts the balance of power away from employers in salary negotiations. And if salaries were to rise faster than prices, their purchasing power would rise.
For companies, it’s getting increasingly difficult to recruit the necessary talent. Recruiting and holding on to employees is becoming key to remaining competitive, particularly in the service sector where labour is both the main source of revenue and the biggest cost item. The challenge for companies will be to defend their margins.
For central banks, there is also a new challenge – controlling inflation. They may be tempted to turn towards even more restrictive policies to break the wage-price spiral, at the risk of damaging full employment.
For governments, the robust labour market is excellent news as it will boost tax revenue while reducing unemployment benefit payments.
The return to full employment is an opportunity for some and a challenge for all.
Written on April 8th, 2022 by Olivier de Berranger, CIO, LFDE