December 2, 2023

Now, March 19, 2022, a hiring sign is displayed in front of a restaurant in Rehoboth Beach, Delaware.

Stephanie Reynolds | AFP | Getty Images

Labor shortages have plagued major economies and fueled inflationary pressures since the outbreak of Covid-19, but economists expect the trend to finally abate this year.

Central banks around the world have been aggressively tightening monetary policy for more than a year to curb high inflation, but labor markets overall remain stubbornly tight.

Last week’s U.S. jobs report showed that was the case in April despite recent turmoil in the banking sector and a slowing economy. Nonfarm payrolls rose by 253,000 for the month, while the unemployment rate was at the joint lowest level since 1969.

That tightening is reflected in many advanced economies, and with core inflation also remaining sticky, economists are divided on when institutions such as the Federal Reserve, European Central Bank and Bank of England will be able to pause and eventually cut rates.

In the U.S., the Federal Reserve said last week it may pause rate hikes, but markets remain uncertain whether the central bank still needs to push rates higher based on incoming data. Job vacancies fall to lowest level in nearly two years in March

However, Moody’s last week predicted that the gap between labor supply and demand in advanced G-20 (Group of Twenty) economies is expected to narrow this year, amid tighter labor market conditions as financial conditions tighten and the lagged impact of the cyclical economy slows growth. will be relieved. Less demand for workers.

By mid-2022, as bottlenecks and demand recovery ease, the supply chain shortages seen in the wake of the pandemic turn into surpluses of goods and materials for retailers and manufacturers.

Fed Chair Jerome Powell: Cooling labor market suggests recession is likely to be avoided

Jeffrey Kleintop, chief global investment strategist at Charles Schwab, expects a similar reversal in the labor market later in 2023 once the lagged effects of tightening monetary policy kick in.

“Companies’ communications on earnings calls and shareholder presentations show an upward trend in references to layoffs (including phrases like ‘layoff’, ‘layoff’, ‘layoff’, ‘staff furlough’, ‘layoff’ and ’) and a downward trend in references to labor shortages (including phrases such as ‘labour shortage’, ‘unable to recruit’, ‘difficulty recruiting’, ‘difficulty filling vacancies’ and ‘shortage of drivers’),” Kleintop highlighted in Friday’s in a report.

For the first time since mid-2021, phrases related to layoffs have begun to outpace phrases related to labor shortages in U.S. corporate earnings since the start of the year, data compiled by Charles Schwab shows.

“From shortage to surplus”

Kleintop also pointed to stricter lending conditions as a reason for the weaker job outlook, noting that there is “a clear and intuitive dominance relationship between bank lending standards and job growth.”

“The magnitude of the recent tightening of lending standards by U.S. and European banks suggests a shift from job growth to job contraction in the quarters ahead,” he said.

Lower labor demand will be the main driver of further reversals over the next three to four quarters, while higher borrowing costs for businesses and households will reduce hiring intensity, consumer spending and economic activity for the full year, Moody’s said on Friday.

“Modest increases in labor supply will also ease shortages, driven by higher participation rates among younger worker groups and waning pandemic-related frictions,” Moody’s strategists said.

“Across most of the G20 AE (advanced economies), labor force participation in the under-65 age group has returned to (or in some cases surpassed) pre-pandemic levels, suggesting that strong wage growth over the past two years has Much of it has been successful in luring workers back into the workforce.”

Job vacancies fall to 9.59 million in March

Service sector job growth has been a key factor in the labor market’s response to a weakening global economy over the past year as demand surged in the wake of the pandemic.

Charles Schwab’s Kleintop highlighted that the gap between the recessionary services and manufacturing PMIs (Purchasing Managers’ Index) is the widest on record.

“The record gap between growth in services and weakness in manufacturing suggests that this imbalance may need to be readjusted,” he said.

“If the lagged effects of bank tightening start to have a bigger impact, this could be a strength in the services economy – and therefore employment.”

Weaker labor market conditions could help central banks that have long been concerned that a tight labor market and strong wage growth could stoke inflation in their respective economies.

That could lead policymakers to take a more dovish stance, which would boost stocks, Kleintop said.

“However, the transition from shortage to surplus in the labor market may not be fast enough to reduce core inflation sharply by the end of the year, leaving the central bank free to declare victory over the drivers of inflation and begin aggressive rate cuts,” he added.

risk of resurfacing

While they agree that labor shortages in advanced economies will recede this year, Moody’s strategists say that as populations continue to shrink as populations age, the situation is unlikely without meaningful policy action to increase workforce size and productivity. May reappear.

The rating agency said aging would lead to a sharp decline in the available labor supply in most advanced economies, with South Korea, Germany and the United States being particularly affected.

Based on estimates of the aging workforce lost since the Covid pandemic, Moody’s sees the impending drag as “significant”.

U.S. economic conditions could get 'softer,' rate cuts to come, strategists say

In the US, Moody’s estimates that the labor force participation rate fell by 0.8 percentage points from the last quarter of 2019 to the present, with nearly 70% of the decline due to aging, implying that about 1.4 million workers were lost due to aging.

“This ‘demographic drag’ on participation rates has been most pronounced in the euro area, Germany, and Canada. However, idiosyncratic factors and policy actions in France, Australia, South Korea, the euro area, and Japan have been able to offset their recent demographic drag” Moody’s Strategists said.

Offsetting factors they identified through data since the turn of the century include rising female labor force participation, immigration, and advances in technology and training.

“Thus, policies that encourage immigration, female labor force participation, or the adoption of new, productivity-enhancing technologies will determine the magnitude and duration of labor supply challenges. Without these, we expect recruitment challenges to resurface in the next business cycle,” Mu said. Dee’s strategists think.