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.
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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.
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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,...
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