Job markets are defying central bankers’ efforts to cool demand

The strong job market is good for workers but bad for inflation, signalling to the world’s central banks that they cannot ease up

In Ireland, unemployment has dropped to 4.3%. Picture: iStock

Robust labour markets around the world 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 is bad for inflation, signalling to the world’s central banks, which are raising interest rates at the most aggressive pace in decades, that they cannot 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 of September, employment across manufacturers and service providers globally had climbed each month for the last two years. And the Organisation for Economic Co-operation and Development
(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 labour markets,” said Joseph Lupton, global economist at JPMorgan. 

Strong job growth is absolutely the central support for the consumer.

Global trend 

In the euro area, unemployment is at the lowest point in the common currency’s 20-year history. In Ireland, the latest figures show it has dropped to 4.3%. 

Large industrial economies including Australia, Canada, and South Korea are also seeing tight labour markets despite rising interest rates.

In the US, the unemployment rate is at 3.5%, 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.

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 is 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.

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 Federal Reserve’s 2% target, and even more if price pressures have grown entrenched. 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 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 is London’s Heathrow Airport, who 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 cannot fill open positions.

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.

• Bloomberg