Covid has caused huge shortages in the job market. It can fade

Since the start of Covid-19, labor shortages have plagued major economies and heightened inflationary pressures, but economists expect that trend to finally ease this year.

Central banks around the world have been aggressively tightening monetary policy for more than a year in an effort to contain soaring inflation, but labor markets have remained stubbornly tight.

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

This tension is reflected in many advanced economies, and with core inflation also remaining sticky, economists are divided on when the Federal Reserve, European Central Bank and Bank of England can suspend, and possibly reduce, interest rates. rates.

In the United States, the Federal Reserve signaled last week that it may pause rate hikes, but markets remain uncertain about whether the central bank will need to push rates higher further in light of the data. incoming. Job postings in March fell to their lowest level in nearly two years

However, Moody’s forecast last week that the gap between labor supply and demand is expected to narrow in advanced G-20 (Group of Twenty) economies this year, easing market tensions. labor as growth slows with the lagged impact of tighter financial conditions and cyclical conditions. the demand for workers declines.

In mid-2022, the supply chain shortages that arose as a result of the pandemic turned into a glut of goods and materials for retailers and manufacturers, as bottlenecks and a resurgence demand moderated.

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

“Company communications on earnings calls and shareholder presentations reveal an upward trend in mentions of job cuts (including phrases such as ‘downsizing,’ ‘layoffs,’ ‘reducing workforce”, “employees on leave”, “downsizing” and “staff reductions’) as well as a downward trend in mentions of labor shortages (including phrases such as ‘labour shortages’ ‘, ‘inability to hire’, ‘difficulty in hiring’, ‘difficulty in filling positions’ and ‘shortages of drivers’), ” Kleintop pointed out in a report on Friday.

Data aggregated by Charles Schwab showed that in U.S. corporate earnings since the start of this year, phrases relating to workforce reductions began to overtake those relating to labor shortages for the first time since the mid-2021.

“From shortages to gluts”

Kleintop also cited tighter lending conditions as contributing to a weaker job outlook, pointing to a “clear and intuitive prominent relationship between banks’ lending standards and job growth.”

“The extent of the recent tightening of bank lending standards in the United States and Europe indicates a shift from employment growth to employment contraction over the coming quarters,” he said. .

Weaker 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 the hiring intensity, consumer spending and economic activity during the year.

“Modest labor supply growth will also ease shortages, driven by higher participation rates from younger cohorts of workers and the easing of pandemic-related frictions,” Moody’s strategists said. .

“Participation rates of age cohorts under 65 have returned to (or in some cases exceeded) their pre-pandemic levels in most G20 EAs (advanced economies), indicating that The past two years of strong wage growth have been largely successful in enticing workers back into the labor market.”

Employment growth in services has been a key driver of labor market resilience in the face of global economic weakness over the past year, driven by a surge in demand following the pandemic.

Charles Schwab’s Kleintop pointed out that the gap between services and the manufacturing PMI (Purchasing Managers Index), which is in recession, is at its widest on record.

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

“That could be the strength of the service economy – and therefore jobs – if the lagged impact of the banking squeeze starts to have more of an impact.”

This weakening in labor market conditions could help central banks who have long worried about the possibility that tight labor markets and stronger wage growth could add to inflation in their respective economies.

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

“However, the shift from shortages to gluts in the labor market may not be fast enough to bring core inflation down materially by the end of the year to give central banks the freedom to declare the victory over the engines of inflation and start cutting rates aggressively,” he added. he added.

Risk of resurfacing

Although they agreed that labor shortages in advanced economies will ease this year, Moody’s strategists suggested they could resurface without significant policy action to increase the size and productivity of the workforce, as the aging population continues to reduce the workforce.

The rating agency said aging will lead to a sharp decline in the supply of available labor for most advanced economies, with South Korea, Germany and the United States particularly hard hit.

Based on estimates of labor supply lost to aging since the Covid pandemic, Moody’s believes the coming drag will be “significant”.

In the United States, Moody’s estimates that aging is responsible for almost 70% of the 0.8 percentage point drop in the labor force participation rate between the last quarter of 2019 and today, representing a loss of about 1.4 million workers due to aging.

“This ‘demographic brake’ on activity rates has been greatest in the Eurozone, Germany and Canada. However, idiosyncratic factors and policy measures in France, Australia, Korea, the Eurozone and Japan were able to offset their recent demographic drag,” Moody’s strategists said.

The offsetting factors they identified through data from the turn of the century included gains in women’s labor participation, migration, and advances in technology and training.

“As a result, policies that encourage immigration, the participation of women in the labor market, or the adoption of new productivity-enhancing technologies will determine the extent and persistence of labor supply problems. them, we would expect hiring problems to reappear in the next business cycle,” Moody’s strategists explained.