- Usually, a slowing economy is associated with rising unemployment. But we are in unusual times
- Can we really have a ‘jobful’ recession?
The UK labour market is still running hot. Unemployment remains doggedly low at 3.8 per cent, and vacancies have dipped only slightly. This means that there is now in effect almost one vacancy for every person currently registered as unemployed. As my chart shows, things have changed significantly since the pandemic – in early 2020, there were almost twice as many unemployed workers as vacancies.
Wages are also rising, but not quickly enough to keep pace with inflation: real regular pay has fallen by 3 per cent over the year. But today’s nominal pay growth is still causing disquiet. Berenberg’s senior economist Kallum Pickering notes that “wages are not rising fast enough to offset surging inflation, but they are rising too fast for the Bank of England's (BoE) liking, as it wants to return inflation to target”.
We know that the central bank is disconcerted by the state of the labour market. In its August monetary policy report, the BoE revealed that it expects nominal wage growth to intensify inflationary pressures over the near term. It also highlighted the significance of the UK’s high level of vacancies, stating that “the ratio of vacancies to unemployment implies a greater degree of labour market tightness and more upward pressure on wage growth”.
Rate hikes should put the brakes on wage rises by cooling expectations of future inflation and reducing pay demands. But they will also put the brakes on the economy: the BoE expects to see unemployment of 6 per cent as the economy contracts over the next few years.
Yet is it possible that the economy will cool to a sweet spot where vacancies and wage growth are reduced without unemployment having to rise? After all, these are not normal times. The debate about the possibility of a ‘jobful’ recession has been rumbling on in the US, and at first glance, the case looks promising.
Andrew Hunter, senior US economist at Capital Economics, argues that a recession could have a relatively mild impact on today’s labour market. “With most indicators suggesting labour shortages remain acute, firms may be wary of laying off workers for fear of being unable to re-hire them when demand recovers”, he explains. Fed economists Andrew Figura and Chris Waller also argue that a “soft landing” is possible for the labour market. Their research found that the high vacancies to unemployment ratio means it should be possible to reduce vacancies with a much smaller effect on hiring than we have seen in the past.
This could be good news for the UK, which has a particularly acute vacancies problem. Research from the Oxford University Migration Observatory found that Brexit has played a part: the rise in vacancies in the UK has been highest in jobs that relied most heavily on EU workers pre-pandemic. But there are other competing explanations too: the paper argued that “higher inactivity among people over the age of 50 has been the most important contributor to the decrease in the size of the workforce”. Could tighter monetary policy chop back some of these vacancies without the associated pain of higher unemployment?
This may be wishful thinking. Economists Olivier Blanchard, Alex Domash and Larry Summers argue that vacancies and unemployment are actually driven by different factors. While vacancies are a function of how good the labour market is at ‘matching’ workers to jobs, unemployment moves with economic activity. They argue that higher vacancies are not just ‘slack’ that can be painlessly removed, but a more ominous sign. High vacancies suggest that the matching efficiency of the labour market has got worse, implying a higher natural rate of unemployment in the long term.
Blanchard, Domash and Summers’ research argues that the hope of a ‘jobful’ recession “flies in the face of theoretical and empirical evidence”, concluding that “fighting inflation will require a decrease in vacancies and an increase in unemployment. There is no magic tool”. Yet hope remains that this time, it might be different. Figura and Waller hope that “something unprecedented can occur because the labour market is in an unprecedented situation”. Let’s hope they are right: a surprise to the upside would certainly be welcome.
