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Across the Atlantic, the odds of a 'soft landing' are getting slimmer
(Published on August 17, 2023)Across the Atlantic, the odds of a 'soft landing' are getting slimmer
In the latest UK labor market data we saw that both unemployment and layoffs have slightly increased, while vacancies have been steadily falling over the last 13 months. At the same time, the labor force has started to grow again recently after a dismal post-pandemic performance. That would suggest that —after 14 consecutive interest hikes— the Bank of England may be succeeding in rebalancing the labor market by cooling labor demand (albeit without having much of an impact on pay so far), a task which should become easier as long as labor supply keeps expanding.
Whether this cooling down will be mild enough to prevent unemployment from raising substantially, however, remains an open question. In other words, whether a "soft landing" (to borrow a concept popular in the US) can be achieved in the UK —with the Bank managing to cool down labor demand and eventually bring down upward wage pressures without significantly swelling unemployment— is uncertain. What we can say is that the likelihood of this prospect in the UK looked worse than in the US to start with and —I argue— it has been deteriorating.
Looking at the Beveridge Curve for some answers
Before the pandemic the curve used to be downward sloping and relatively flat
The curve illustrates the inverse correlation between the vacancy rate and the unemployment rate. Its downward slope indicates that as labor demand diminishes, signified by fewer job openings, unemployment rises. The idea is that this historical correlation between unemployment and job vacancy rates offers a guide for potential future outcomes. A flatter curve slope indicates that a greater increase in the unemployment rate is associated with a given vacancy rate decline. Historically the UK standard Beveridge curve has been relatively flat (see the yellow, green, and light blue dots for the years 2001-2019 in the chart below), which implied that a considerable reduction in the vacancy rate was usually associated with a substantial surge in the unemployment rate, and viceversa.
The slope of curve steepened since 2020
Since 2020, however, this association has broken down and the curve's slope became much steeper. Job retention schemes that prevented unemployment from raising during widespread lockdowns explain only the first part of the story. Even as vacancies started to come down from their peaks in 2022, the unemployment rate failed to increase as much as the pre-covid curve would have predicted (joblessness even decreased between January and September 2022, making the curve's slope positive for a brief time). Such dynamics gave some initial hope to those talking about a possible "soft landing" for the UK labor market.
A slow return to the pre-pandemic slope?
In the first six months of this year such benign dynamics have started to come under stress. As the vacancy rate slowly but steadily continues to head towards pre-pandemic levels, we are starting to see the Beveridge Curve flattening again (see March and June 2023 data points). This means that going forward we may expect proportionally bigger jumps in unemployment as vacancies continue on their downward trend. While it's probably to early to tell whether the flattening will continue unabated, it is worth calling it out. Such developments certainly make the odds of a "soft landing" look slimmer today.
Job-hopping and competition for a shrinking pool of open jobs
While employed workers switching jobs have always been the most important component of new hires, this group has become even more important in the post-pandemic recovery. In Q2 2023, UK workers were still quitting at a rate around 1/5 higher than pre-covid average. This is because job-hopping remains high by historical standards, and open positions are often filled by job switchers. In Q2 2023, job switchers made up 48.3% of UK new hires, up from 45.1% in Q2 2019. This means that unemployed people have been competing not only with their unemployed peers for vacancies, but also with employed workers who would like to change their jobs. As FED economists recently suggested, "it would be remiss then not to account for employer-to-employer transitions when constructing the Beveridge curve". And that's what I did in Figure 2. However, doing that does not really change our story. If anything, it makes the flattening of the curve in 2023 even starker.
Conclusions
Whether or not you were a "soft landing" believer in the first place, the latest batches of UK labor market data are casting even more doubts on this prospect. If we also consider that upward pressure on UK wages is stronger than in most other advanced economies, the picture looks even worse. While the UK labor market remains relatively robust by historical standards, recent trends suggest a cooling down. It remains to be seen whether this is a transient phase or the start of a trend leading to a substantial rise in unemployment levels in the forthcoming quarters.
Aging workforces: What can we learn from the Italian labor market?
(Published on July 3, 2023)Aging workforces: What can we learn from the Italian labor market?
Italy ranks second only to Japan when it comes to population aging, with people aged 65 or older accounting for nearly one-quarter, or 24%, of the population in 2022. This is not news. The Italian population has been decreasing for nearly a decade, and last year the country recorded the lowest number of births ever. According to a new analysis by CDP Cassa Depositi e Prestiti, a public development bank, the working-age population (consisting of people aged 15-64) has declined by approximately 1.9 million since 2011, amounting to about 7% of today's labor force. The Italian statistical office (ISTAT) predicts a further reduction of 1.8 million people by 2030. While this issue is not new, it has become increasingly severe over time. Italy has witnessed more deaths than births for several years, and since 2014, migration flows have been insufficient to compensate for the declining fertility rate. Consequently, Italy's experience may offer a cautionary tale for other countries, both high- and middle-income, that are also facing rapid aging.
Unsurprisingly, with fewer workers around, hiring will get more difficult
As the population decline continues, Italian employers have increasingly voiced concerns about the scarcity of suitable candidates to fill job vacancies and the shortage is not limited to occupations that require technical or advanced qualifications. Since 2021, reports of hard-to-fill vacancies due to a lack of workers have spread throughout the labor market and have been particularly notable in the construction and services sectors, industries that traditionally employ a relatively high number of workers in lower skilled positions in Italy.
But it’s not just about the workforce shrinking, skills matter too
The problem is not purely stemming from workforce shrinking and having fewer workers around, the balance between demand and supply of skills is also off. As a larger proportion of older workers -who are generally less qualified than their younger counterparts- retire or are expected to do so in the next five to ten years, employers are often struggling to replace them with younger, more educated individuals. There is already evidence that this may have increased the level of skill mismatch in the Italian labor market: the percentage of highly educated workers employed in occupations that require low levels of education (well below tertiary degree standards) has risen by a full percentage point in the last decade, according to CDP's calculations. This highlights a growing disconnect between supply and demand, as younger workers are forced into jobs they are overqualified for, leading to detrimental effects on productivity and wages. This phenomenon is expected to worsen as more and more older, less-educated workers retire in the coming years. It may even have contributed to the increase in “brain drain” Italy has witnessed over the last decade, as the number younger highly educated Italians leaving the country shot up.
A very Italian problem that does not seem easy to solve
This problem is particularly acute in Italy where the proportion of jobs that do not require a university degree is higher than in other big European economies, such as France, the UK or Germany. Workers in Italy are, in fact, almost one-third (or 31%) less likely to be employed in professional occupations compared to the average worker in the euro area, and almost a quarter (or 23%) more likely to work in elementary occupations. Solutions that would alleviate the problem exist but may not be easy to implement due to lack of resources or political appetite in the current Italian landscape. One solution is almost a no-brainer: increase the labor force participation of women, which currently stands at a very low level in Italy by European standards. However, this seems particularly difficult in the short-term due to the lack of affordable childcare and cultural attitudes that reinforce gender stereotypes in Italian households. Another more immediate solution would be to boost immigration to the level of other large EU countries by simplifying bureaucracy and offering more direct routes to citizenship, making Italy a more attractive place for foreign workers. Unfortunately, this solution seems even less palatable in the country's current political and economic climate. It should not come as a surprise then if -for the foreseeable future- Italian employers may need to get used to a new normal where hiring will get increasingly challenging.
(Link to the CDP's analysis written in Italian.)
How strong is the case for labor shortages?
(Published on May 26, 2021)How strong is the case for labor shortages?
As economies have started to reopen in recent weeks –with the hospitality and leisure sectors at the forefront– claims of workers' shortages on both sides of the Atlantic got louder. This is happening even as unemployment remains on average between 1 and 2pp above pre-pandemic levels and employment remains depressed (not to mention the millions of workers still furloughed in Europe). What should we make of this?
For starters, the jury is probably still out.
The US is the market where the case for labor shortages seems strongest. As the BLS jobs report came in with a disappointing 266k gain instead of the 1m expected last month, the temptation to point to labor shortages was strong. The JOLTS report, released later in the month, showing a record ratio of open jobs to hires definitely added fuel to the fire. The reality, though, is that it’s hard to make any claims based on just one or two months of data. The signals the US data is sending are both in support of employers having trouble getting workers (ie rising hours worked and wages in leisure and hospitality; surging vacancies), but also against this view (ie a 430K net increase in labor force participation; volatile jobless claims).
In the UK the evidence seems even more mixed, as the latest employment data pointed to strong hiring with the sharpest increase in payrolls since the pandemic began on one hand, but also to a slight rise in the number of inactive people on the other. On top of that, once stripped out of compositional effects (ie the decrease in the share of low-paid employees), wage growth remains unimpressive, providing further evidence that the risk of a "hot" summer for the UK labor market remains low (to paraphrase The Economist).
Eurozone economies are at an even earlier stage of the reopening and their case for labor shortages is probably the weakest. Employment in the euro area fell by 0.3% in the first quarter as 5m workers remained furloughed in France and Germany alone. Unemployment is actually expected to increase as furloughs start to be tapered.
Even if further data will make the case for labor shortages stronger, there are reasons to believe that most of its drivers are temporary.
Many workers moved during the pandemic, meaning that potential workers may now be in the wrong parts of the country (or back to the EU when it comes to the UK) and unable to fill open vacancies. Full reopening and slightly higher wages should realign this imbalance in a relatively short time.
Generous unemployment benefits and furlough schemes that may be keeping workers idle or tied to jobs bound to disappear are going to be tapered soon.
Health concerns and childcare issues that may be keeping people out of the workforce should become less relevant as vaccine rollouts continue at pace and lockdowns are fully lifted.
Wage inequality and the rise of the "consolidated advantage" (paper review)
(Published on April 12, 2021)Wage inequality and the rise of the "consolidated advantage" (paper review)
Wage inequality in most advanced economies has risen persistently since the 1980s. A thought-provoking new working paper by Nathan Wilmers (an assistant professor at the MIT Sloan School of Management) and Clem Aeppli (a Sociology PhD student at Harvard) contributes to our understanding of this trend by looking at the problem from a novel perspective.
Instead of focusing on either jobs or workplaces in isolation, the researchers looked at changes in both what workers do and what type of firms employ them. Using data from the US for the period 1999-2017, they find that increasing wage inequality occurred not because of changing pay-offs to where one works or to what one does at work, but because the correlation between a worker's occupation and whether the firm they work for pays more or less than average has increased significantly – a phenomenon they dub "consolidated inequality."
Crucially, they point to an increasing sorting of high paying jobs in firms that pay above average (think software engineers in tech companies) and of low paying ones in firms that pay less than average (cleaners in janitorial services contractors, for example). According to their estimates, this accounts for two-thirds of increased wage inequality in the US since 1999. Even those who have been casually following this debate in the news or elsewhere will be able to point to a handful of big labor market shifts that are often called out when it comes to wage inequality. We can list such common explanations mainly under two groups: those explaining the increase or fall in wages over time according to the type of job a worker does (their occupation) and those explaining the increase or fall in wages according to the type of company where a worker is employed:
Set 1 - explaining a higher or lower wage according to what one does
Skill-biased technological change (SBTC): technological progress that disproportionally favors skilled workers, increasing demand for them and their wage premiums.
Automation: computers and machines replacing workers in jobs with a higher prevalence of routine tasks, decreasing demand for them.
Set 2 - explaining a higher or lower wage according to where one works
Polarization: the expansion of both low- and high-paid jobs (mainly in the service sector) at the expense of those jobs in the middle of the distribution (often in manufacturing), inevitably linked to long-term trends such as automation and globalization. This is also referred to as "hollowing out of the middle".
Outsourcing and workplace fissure: the contracting out of those jobs that are not considered "core" for the business to other firms (based at home or abroad) that specialize in providing those services.
Loss of workers' bargaining power: due to shifts such as the decline of unions and the dominance of a particular employer in a specific location (what economists cryptically refer to as "monopsony").
Superstar firms: the rise of extremely successful firms that pay disproportionately high wages.
The research shows that the contribution to wage inequality due to either changes to occupation pay-offs (Set 1) or changes to workplace pay-offs (Set 2) have stayed roughly constant over the past 20 years. What has increased is their combined effect: highly paid occupations have become more likely to be located at high-paying companies, while poorly paid occupations have increasingly clustered in low-paying firms, leading to a consolidation of workplace and occupation inequalities.
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