Labour market: when good means bad and bad is good

For weeks, financial market analysts have been watching the development on the labour market with a wary eye. Unemployment rates are in some cases historically low. But suddenly good labour market data have become a burden for the financial markets. What has happened? Why are good figures suddenly seen as bad?

The reason can be found in second-round effects: In an environment with excessive inflation, employees increasingly try to compensate for the otherwise threatening loss of real purchasing power by demanding higher wages. If they succeed, companies are tempted to pass on the higher labour costs to consumers through higher prices – inflationary pressure is thus further increased by a second, indirect round. The central banks are forced to act restrictively and thus slow down the economy – good figures become a bad omen.

 

 

Two remarks in this regard:

• The unemployment rate as such falls short of an analysis of the workforce power, as it is strongly driven by other factors, including structural ones. One relativizing factor, for example, can be the currently often cited shortage of skilled workers.
• The softening and flexibilisation of employment relationships as well as the fundamentally lower degree of workers’ organisation lead to a deterioration in the negotiating position of job seekers, which reduces the potential pressure on wages. A scenario like the one in the 1970s, where second-round effects resulted in sustained excessive inflation, is therefore not to be expected at present.

In general, a better indicator of labour market pressure is not unemployment per se, but the development of job vacancies – how desperately people are looking for jobs and how much they are being paid – and the number of voluntary job changes, as these are often accompanied by a wage increase and are only made at all for this reason.

Both indicators show a good – because worsening – picture for the US: the pressure on the labour market is decreasing. The risk of second-round effects thus remains manageable and the pressure on central banks to further raise interest rates will decrease.