Bloggers from Totaljobs and Appcast say job markets have barely weakened on either side of the Atlantic.
Andrew Flowers is the US labour economist at Appcast. Julius Probst is the European labour economist at Totaljobs. Both companies are part of Stepstone, one of the world’s largest recruitment platforms and an arm of Axel Springer Group.
The U.S. labour market is historically tight. But just how tight?
Everyone these days has their favorite labour market indicator. While most of them are directionally consistent in showing tightness, they differ by degree.
In our first chart, inspired by the work of Jason Furman and Wilson Powell III, we plot five key measures of the labour market:
1) The unemployment rate; 2) the openings rate; 3) the “quits rate,” or share of workers who quit their jobs; 4) the openings-to-unemployed persons ratio; and finally, 5) the employment-to-population ratio – “EPOP” – of prime-age workers between 25 and 54 years old.
(We are comparing all measures directionally to the unemployment rate; that means we invert the subsequent four indicators, which have a negative correlation with the unemployment rate. For example, when the unemployment rate is low, the prime-age EPOP ratio is high; we subtract that indicator from 100. And so on.)
All five indicators are standardised, meaning each series is normalised with an average of 0 and standard deviation of 1, covering the period since 2001. For the statistically inclined, these are known as z-scores. The idea is to measure historical variation from “normal.”
All five series show the U.S. labour market far into the “tightness” zone (below 0). The two “loosest” indicators now, relatively speaking, are the unemployment rate and prime-age EPOP. Notably, these were the “tightest” indicators in the period just prior to the global financial crisis. It’s also worth pointing out the dispersion of these five indicators; the various series are more widely spread out than they have been in the recent past.
While the above chart nicely summarises how tight the job market is, even after a year of rate increases, there is a another simpler, higher-frequency indicator that we’re watching in 2023: initial claims for unemployment insurance.
In our second chart, we show that this data point has stayed low – below 2019’s annual average. The large layoffs in the tech industry have made headlines, but that sector has been an outlier.
Initial jobless claims will probably be an early indicator if the labour market is set to loosen.
The UK macroeconomic outlook remains challenging: inflation has remained above 10 percent and a recession seems likely this year (though things will perhaps not be quite as bad as the Bank of England has forecast).
However, there is reason to believe that the gloom won’t be particularly reflected in the unemployment rate.
Our third chart shows that the UK labour market has been extremely tight for more than a year and is only starting to return to the past trend. Job vacancies per 100 employees were at record highs throughout 2022, and are still historically elevated across all sectors.
There are reasons to believe that employment will hold up better than it did in previous downturns. Brexit has led to a huge shortage of workers in certain sectors, especially in the hospitality industry. Blue-collar workers might actually fare better in this slowing economy than their white-collar equivalents.
In our fourth chart, online job advertisements tell a similar story. Job postings held near record highs throughout 2021 and 2022, especially in transportation, logistics, hospitality, warehousing and catering.
Following the lockdowns in the early stage of the pandemic, those sectors experienced surging demand as the economy reopened. By that time, many workers had left for other jobs, and Brexit severely aggravated the shortage. According to some estimates, about 350,000 workers are "missing” as a result of the UK quitting the European Union.
As in the US, the UK tech labour market is experiencing a slowdown. But that was after software development and other IT jobs saw a massive hiring surge throughout 2022.
The UK labour market saw a record amount of job switchers in 2022. Wage demands increased significantly – alongside demands for other benefits, such as work from home and more flexible working hours.
Overall, the situation for jobseekers is still very good. Workers are realising that they’ve gained back some of the bargaining power they lost in previous decades.
In the long run, workers across advanced economies will see their bargaining power keep improving as societies age, leading to labour pools that are stagnating or even shrinking. Employers are increasingly concerned that technological change might not offset the smaller workforce.
As our final chart shows, in Germany, the working-age population might decrease by more than 10 million (20 percent) through 2050 – converging with France and the UK.
In China, the working-age population will almost halve – shrinking from more than 900 million today to about 500 million by the end of the century.
These adverse demographics will have massive implications for workers. A shrinking labour pool might lead to very different inflation and wage dynamics compared to the period post-1990, when China and former Communist countries “joined” the global economy, adding hundreds of millions of workers.
All opinions expressed in this guest blog do not reflect the views of Macrobond Financial AB.
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