Job Markets Are Defying Central Bankers’ Efforts to Cool Demand


Robust labor 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, signaling 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 slow, 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 of September, employment across manufacturers and service providers globally had climbed each month for the last two years, according to a JPMorgan Chase & Co. gauge produced by S&P Global. And the OECD said unemployment in its 38 member nations reached 4.9% in August. The rate was below or equal to the pre-pandemic level in 80% of the countries.  

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

Global Unemployment in 2023

Forecast for jobless rate

Source: IMF

Note: Mapped data show rates for distinct economies.

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

Data out 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 labor. The pandemic had led to many people leaving the workforce while also disrupting the normal flow of immigrant labor. The combination of higher demand and lower supply “propelled us pretty rapidly to a tight labor market,” said Julia Coronado, president of MacroPolicy Perspectives Llc.

Policymakers will be sifting through Friday’s 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 labor 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% 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% and succeeded in slowing economic growth without killing it off or fueling unemployment. But during periods of high inflation in the 1970s and 1980s, Fed tightening led to unemployment rates surging to 9% in 1975 and 10.8% 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% 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 toward the end of this year,” she said.

Weaker Expansion

The IMF's growth outlook has been cut sharply since the start of 2022

Source: IMF World Economic Outlook

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 Inc., 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 Inc. 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 labor-force participation problem, with at least 300,000 fewer people employed than before the pandemic. One example: London’s Heathrow Airport has flagged 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 labor demand has moderated, “there remains a lot of wood to chop to get labor demand and supply back into balance,” said Sarah House, a senior economist at Wells Fargo & Co. 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 labor.”

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% 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 materialize for some time, said Robert Carnell, chief economist for Asia Pacific at ING Bank NV. 

“There is an argument for labor hoarding that may keep labor 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.”  

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