Central banks are risking the best job market in a generation

If we weren’t constantly being told otherwise, we’d be celebrating the health of the job market. The proportion of French, German, Canadian, Japanese, Dutch, Korean and Italian jobs among working-age adults is at an all-time high. In the US, UK and Spain, the employment rate has only been higher than it is today at a few brief moments in history – at the end of long booms or recoveries in 2000, 2007 or 2019.

Even employees who are dissatisfied with their job rarely had more vacancies to choose from. And just as one would expect in a market economy, where employers compete for workers, not workers for jobs, nominal wages are also rising, also at record rates (though not fast enough to keep up with price spikes caused by supply shocks).

In short, workers in Western countries have benefited from the strongest labor markets in more than two decades, arguably more than half a century. Yet our central bankers and other policymakers seem determined, even eager, to kill them. In fact, they may have already dealt him a fatal blow.

We know the rationale, of course: that ending the employment boom is necessary to bring inflation down. But this argument carries the risk of sustaining high price growth, and easily to the point of obscuring the consequences of price growth being pushed down. It covers up how good the job market we seem willingly sacrifice really is.

One can understand why employers resent a “shortage” of labor. It weakens their bargaining power. If allowed to last, it could allow workers to take some of the economy’s value added away from business owners. And it’s forcing managers already grappling with rising input costs to find more productive ways to employ employees they’re paying more to retain. Employers who cannot increase their productivity are likely to lose their workers to more productive competitors. Data from the US show that since the late 1990s, wage growth among job changers has outpaced those who stay the most.

But government policymakers, including central bankers, are tasked with protecting the public interest. This is not the same and may even contradict what makes life easy for today’s business owners. Truly competitive capitalism does not.

But instead of hailing the most worker-friendly labor market in generations as “strong,” central bankers tend to condemn it as “squeezed.” That would be an apt word for running out of workers. But most major economies are attracting more and more people to work at an amazing rate.

In the most recent quarter of available comparable data, just before summer, the employment rate rose by 0.3 percentage point in the US and Canada, by 0.4 percentage point in the EU and Japan, and by 0.6 percentage point in Korea. These blockbuster figures speak of labor markets that are not tight but are responsive to stimulus. (The rate has leveled off in Britain, which is struggling with its own problems.)

But those millions of new jobs are being treated as bad news: the general reaction to Friday’s solid US jobs data was expectations of increased Fed hawkishness.

Let’s face it, central bankers are on the verge of dealing with a cost of living shock, willingly dealing a blow to growth and jobs that could go so far as to cause a global recession. They claim this is preferable to the alternative. But they need to do a better job of explaining why the alternative is so much worse. Your “credibility” itself is no more valuable than what it gives you.

If the goal is to avoid inflation settling at moderately higher levels, we need to be told why this is worse than giving up a terrific job market. When it comes to preventing a self-reinforcing dynamic in which wages and prices drive each other up, truly independent central bankers should hold their fire until they see the white of such a wage-price spiral see.

Instead, they are increasingly appearing to be collapsing under the political pressure that comes with high inflation announcements today, over which they have no control. Instead, they should focus solely on the (much more benign) medium-term inflation outlook, which they can.

This approach of tightening monetary policy to counteract a huge supply-side price shock could end in tears. When central banks are wrong, they are criticized for inflicting unforced hardship on millions of people who are least able to bear it, just when our geopolitical security requires popular unity. If they’re right, that amounts to saying that a strong labor market is too bad for workers. However, it is difficult to imagine how our independent monetary policymakers will emerge politically unscathed from this crisis.

martin.sandbu@ft.com

https://www.ft.com/content/3d1092d1-5dec-47ce-81bc-be5cb99392cc Central banks are risking the best job market in a generation

Adam Bradshaw

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