Can the West’s mind-boggling employment miracle continue?
If you want to see what a world swimming in lanes looks like, visit Japan. At airports, people are deployed to straighten suitcases after they have fallen on the baggage carousel. Men in uniform with fluorescent batons stand outside construction sites, politely reminding you that walking to the construction site is probably not a good idea. In department stores, smartly dressed women help you use the elevators. And in one of Tokyo’s best bars, a team of four was involved in preparing your correspondent’s gin martini (from the freezer, of course, free-poured and very dry).
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Now the rest of the rich world is starting to look more Japanese. Since the heady post-lockdown days of 2021, GDP growth in the 38 countries of the OECD has come to a near standstill, and in some countries even negative. Business confidence is below the long-term average. Still, there is not much sign of weakness in the labor market. During his speech on March 2, Christopher Waller, a governor of the Federal Reserve, noted that the US labor market was “excessively tight.” In the OECD as a whole, the unemployment rate stood at 4.9% in December, the last month for which official data is available – the lowest in many decades (see Chart 1). From the third to fourth quarter of the year, the rich world added about 1 million jobs, in line with the long-term average. In half of OECD countries, including Canada, France and Germany, there has never been a higher proportion of people of working age in a job.
Unemployment is rising in some countries, including Austria and Israel. One of the worst performing countries is Finland, where the unemployment rate has risen by more than a percentage point from its post-lockdown low. In the face of rising energy prices and reduced trade with Russia, GDP fell 0.6% in the fourth quarter of 2022. But “worst” is relative. At 7.2% in December, Finland’s unemployment rate is still well below its long-term average. Meanwhile, most of the places synonymous with the skyrocketing unemployment of the early 2010s – Greece, Italy, Spain – are now much better.
This employment miracle points to a profound change in Western economies. Go back to Japan to understand why. Local employers don’t like to lay off employees, even if they have little to do. Partly because more and more people are retiring, companies are struggling to find new staff, so they are reluctant to let people go unless they have no other choice. The result is an unemployment rate that hardly rises even in recessions. Over the past 30 years, Japan’s unemployment rate has varied by only 3.5 percentage points, compared to 9.5 percentage points for the average wealthy country.
A more Japanese labor market would have disadvantages. If employees don’t leave underperforming companies, they can’t go to more innovative companies that stimulate growth. In fact, the data suggests that productivity growth in the rich world is currently exceptionally weak. On the other hand, periods of unemployment can take a terrible human toll, especially on young people, who may earn lower wages for the rest of their working lives. Countries where unemployment is less volatile also tend to have milder recessions, says Dario Perkins of Ts Lombard, a financial services firm. If the labor market is not bursting, people can continue to spend even if growth slows.
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What explains the apparent Japanese turn of employers? Perhaps, after the tribulations of the pandemic, bosses are just friendlier to employees than they used to be. Another more realistic possibility is that companies are in a strong financial position. This enables them to handle lower revenues today without having to cut costs immediately (see Chart 2). Many companies received help from governments during covid. And corporate profits have been high in recent years. Businesses across the rich world are still sitting on cash piles about a third higher than they were before the pandemic.
A more intriguing possibility concerns the labor force. By our estimates, the rich world is “missing” 10 million workers, or roughly 1.5% of the total workforce, relative to pre-pandemic trends (see Chart 3). In Great Britain and Italy, the workforce has even shrunk. older population explains part of the deficit. Covid may have prompted people to reassess their priorities, causing them to quit. Some even speculate that long covid is forcing people to stay on the economic sidelines. Whatever the explanation, declining participation has wreaked havoc with many laid off staff when the pandemic hit, only to struggle to rehire them in 2021. That year, job vacancies in the OECD reached a record high of 30 million.
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With another downturn looming, employers may want to avoid making the same mistake. A recent global report from consulting firm S&P Global Market Intelligence identifies “reluctance among companies to approve job cuts due to the huge challenges they faced in rehiring after the pandemic”. is normal for the beginning of the year. Daniel Silver of JPMorgan Chase, a bank, speculates that this is because “companies are reluctant to let employees go given the perceived difficulties in eventually rehiring”.
Labor market pain can ultimately only be postponed rather than avoided. In some past recessions, unemployment did not begin to rise markedly until some time after GDP began to fall. Still, ‘real-time’ data gives little indication that unemployment is on the verge of rising. A recent survey by ManpowerGroup, an employment agency, suggests that employers in most countries still have ambitious hiring plans. In America, a survey by the National Federation of Independent Business, a lobbying group, finds that an unusually high proportion of small businesses plan to create new jobs in the next three months.
Faced with labor markets that are resilient even in the face of rising interest rates, central banks may be tempted to tighten monetary policy even faster. Further rate hikes or another energy shock could win over some employers, forcing them to reduce headcount. Still, the pressure to retain staff, no matter what, can become a structural problem. Over the next decade, the populations of the rich world will age rapidly, further reducing labor supply. Good employees will probably be harder to find. The search for the perfect martini maker will be even trickier than it is today.
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