Weekly Update - Resilient labour markets are making life harder for central banks
Resilient labour markets are making life harder for central banks
One of the striking features of the post-Covid economy is the resilience of labour markets in most developed economies. In part, this can be explained by the rapid recovery once lockdowns were lifted, but other structural factors are also helping sustain jobs markets in the face of monetary policy tightening and exogenous shocks. Monetary policy-makers are closely monitoring this resilience as, in the absence of productivity gains, it feeds into inflation.
Labour markets in the major developed economies look to be in rude health, both in terms of job numbers and salaries. Employment in these economies has returned to, and in some cases (including France), overtaken pre-Covid levels faster than in other recessionary episodes. In the euro area, unemployment had fallen to 6.6% by end-2022, the lowest since the launch of the single currency, while in the United States and United Kingdom it is at its lowest since the 2000s.In this tight employment market, salaries are also growing faster than they did in the last decade, with bigger rises for the least-qualified jobs.
Such a healthy labour market is at first sight surprising, given the uncertain economic environment. Despite the shock of the Ukraine invasion, more than years’ worth of monetary policy tightening and slowing domestic demand, companies are still keen to hire people. Several factors explain this resilient labour market. First, while employment may be back to pre-Covid levels, the active population is smaller than it was before the crisis, particularly in the United States and the United Kingdom. This reflects the number of deaths linked to the pandemic, the number of workers who retired early and the fall in immigration. Secondly, some companies are putting in place retention plans given the difficulty of hiring/rehiring in the aftermath of the Covid crisis. Finally, the capacity that some firms had to pass the higher input prices to higher selling prices allowed to preserve margins but also a dynamic level of employment.
Overall, while the healthy jobs market has helped the economy ride out recent shocks, it has also fed inflationary pressures. The upward push on wages should maintain pressure on prices, if companies keep their margins constant and in the absence of productivity gains. Which is why central banks and money markets are keeping a close eye on what happens to the employment market. The more evident the signs of overheating, the likelier it is that central banks will keep financing conditions tight.
Finally, in the main events of the week, we have chosen to talk about the inflation in France and to focus on the "Winsdor Framework".