On March 19, 2022, hiring signs are put up outside restaurants in Rehoboth Beach, Delaware.
Stefanie Reynolds | Afp | Getty Images
Since the outbreak of Covid-19, major economies have been suffering from labor shortages and have increased inflationary pressures. However, economists expect this trend to finally slow this year.
Central banks around the world have aggressively tightened monetary policy for over a year to curb soaring inflation, but labor markets by and large have remained stubbornly tight.
Last week’s US jobs report showed that this was the case in April, despite recent turmoil in the banking sector and a slowing economy. Non-farm payrolls rose by 253,000 for the month, while the unemployment rate was at its lowest level since 1969.
This tightening is reflected in many advanced economies, and with core inflation also remaining stubborn, economists are divided over when institutions like the Federal Reserve, the European Central Bank and the Bank of England will be able to suspend interest rates and eventually cut them lower tariffs.
In the US, the Federal Reserve signaled last week that it may pause interest rate hikes, but markets remain uncertain whether the central bank needs to hike further on the back of incoming data. Job vacancies fell to their lowest level in almost two years in March
However, Moody’s last week forecast that the labor supply/demand gap in the advanced economies of the G-20 (Group of Twenty) is likely to narrow this year, easing labor market strains as growth slows on the back of lagging Effects of tightening financial conditions and slowing economic activity demand for labor is falling.
In mid-2022, supply chain bottlenecks created by the pandemic turned into an oversupply of goods and materials for retailers and manufacturers as shortages eased and a resurgence in demand.
Jeffrey Kleintop, chief strategist for global investments at Charles Schwab, expects a similar turnaround in the labor market later in 2023 once the lagged effects of monetary tightening take hold.
“Corporate announcements on earnings announcements and shareholder presentations reveal an increasing trend in mentioning downsizing (including terms such as ‘downsizing’, ‘layoffs’, ‘downsizing’, ‘furloughed’, ‘downsizing’ and ‘downsizing’). ‘) along with a downward trend in mentions of labor shortages (including phrases such as ‘labor shortage’, ‘inability to hire’, ‘difficulty in hiring’, ‘difficulty filling vacancies’ and ‘driver shortage’),” Kleintop pointed out in a report on Friday.
Data aggregated by Charles Schwab showed US corporate earnings since the start of this year, for the first time since mid-2021, terms on downsizing outpaced terms on labor shortages.
“From Shortage to Oversupply”
Kleintop also argued that tighter lending standards contributed to a weaker employment outlook and pointed to a “clear and intuitive key link between bank lending standards and employment growth”.
“The magnitude of the recent tightening of bank lending standards in the US and Europe suggests there will be a shift from job growth to job decline in the coming quarters,” he said.
Falling demand for labor will be the main driver of further reversals over the next three to four quarters, Moody’s suggested on Friday, while rising borrowing costs for businesses and households will reduce hiring intensity, consumer spending and economic activity later in the year.
“Modest labor supply growth will also reduce shortages, driven by higher participation rates among younger workers and easing tensions surrounding the pandemic,” Moody’s strategists said.
“Labor force participation rates for age cohorts under 65 have returned to (or in some cases exceeded) pre-pandemic levels in most G20 (advanced economies) countries, suggesting that the past two years have seen strong wage growth for the most part have been successful in attracting workers back into the labor market.
Job growth in the service sector has been a key factor in labor market resilience amid global economic weakness over the past year, which was attributed to a post-pandemic demand surge.
Charles Schwabs Kleintop stressed that the gap between the services index and the manufacturing PMI, which is in recession, is wider than ever.
“The record-breaking gap between growth in services and weakness in manufacturing suggests an imbalance that may need to be corrected,” he said.
“It could be due to the strength of the service economy – and therefore jobs – when the delayed effects of bank tightening start to have a bigger impact.”
This weakening of the labor market picture could help central banks, which have long raised concerns about the possibility that tight labor markets and stronger wage growth could support inflation in their respective economies.
This could allow policymakers to take a more dovish stance, Kleintop suggested, which would give a boost to stock markets.
“However, the transition from tight to oversupplied labor markets may not be progressing fast enough to bring core inflation down significantly by year-end and free central banks to announce victory over the inflation drivers and begin aggressive rate cuts.” added.
Risk of reappearance
While they agreed that labor shortages in advanced economies will ease this year, Moody’s strategists suggested that without meaningful policy action to increase the size and productivity of the workforce, they could recur as population aging continues to become a problem labor force decline.
The rating agency said that aging will lead to a sharp contraction in the available labor force in most advanced economies, with South Korea, Germany and the US being particularly affected.
Based on estimates of labor shortages lost to aging since the Covid pandemic, Moody’s expects the coming contraction to be “significant”.
In the US, Moody’s estimates that aging is responsible for almost 70% of the 0.8 percentage point decline in labor force participation rates from the last quarter of 2019 to date, representing a loss of around 1.4 million workers to aging.
“This ‘demographic pressure’ on participation rates was most evident in the euro area, Germany and Canada. However, idiosyncratic factors and policies in France, Australia, Korea, the euro area and Japan have offset recent demographic pressures.” Moody’s strategists said.
Among the compensatory factors they identified using data since the turn of the century were increases in female labor force participation, migration, and advances in technology and education.
“As a result, policies that encourage immigration, female labor force participation or the introduction of new productivity-enhancing technologies will determine the magnitude and duration of labor supply challenges. Without them, we would expect the hiring challenges to return in the next business cycle,” Moody’s strategists argued.