Risks around a sharp rise in unemployment
Falling job vacancies could see sharp increases in unemployment in the US and UK, while the EA and Australia look further from this point.
Analysis suggests that further material declines in job vacancies could see a sharp rise in unemployment in both the US and the UK, pressuring the Fed and Bank of England to cut interest rates. Australian and euro area vacancy rates would likely need to fall further before reaching the same point.
Unemployment rates have edged higher in most countries over the past couple of years, but remain historically low, with most of the labour market adjustment to date being borne by falling job vacancies, which capture the unmet demand for labour.
However, some central banks are worried that labour markets have reached the point where they might finally quickly deteriorate in lagged response to higher interest rates, where history often shows that once the unemployment rate starts to increase, it can increase quite rapidly, triggering rate cuts.
One sense of this risk that central banks monitor is provided by the Beveridge curve, which compares job vacancies and unemployment, both expressed as a share of the labour force.
The economy moves along the Beveridge curve over time, with the combination of vacancies and unemployment changing as the economy either picks up or slows down.
- At one extreme, such as in a recession or sharp economic slowdown, the vacancy rate is very low and the unemployment rate is high.
- At the other extreme, such as in an economic boom or sharp economic recovery, the vacancy rate is high and the unemployment rate is very low.
Like most things in economics, the Beveridge curve is not stable over time.
For example, a move outwards in the curve points to the labour market becoming less efficient, with firms finding it harder to match their available jobs with suitable applicants.
During the pandemic, labour markets have been at the second extreme, with vacancy rates across the advanced economies reaching their highest level in decades and unemployment rates falling to historically low levels.
This extreme reflected the strength of economic recoveries from the worst point of COVID, but there were also mismatches in labour markets when migration temporarily stalled during lockdowns and border closures.
Over the past couple of years, vacancies have fallen sharply, which means that labour markets have moved along the Beveridge curve, away from their COVID extreme.
Ranking countries in terms of where they currently are on their curves and hence the risk that unemployment could rise sharply if vacancies fall further:
- The US and UK vacancy rates are broadly back at the point where further material declines could see a sharp rise in unemployment.
- Vacancy rates in Australia and even more so in the euro area would likely need to fall further before they reached the point where unemployment would rise sharply.
New Zealand has already reached the point where lower vacancies are likely to translate into higher unemployment, although this conclusion relies on a private-sector measure of job ads rather than surveying companies directly about their vacancies.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
........
Investment Disclaimer
Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT).
Forward-Looking Disclaimer
This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.
Never miss an update
Get the latest insights from me in your inbox when they’re published.
5 topics
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Comments
Comments
Sign In or Join Free to comment