Job vacancies, job turnover and disinflation

The tight labor market in the United States plays a crucial role in the central bank’s efforts to bring inflation back to its target. Slower labor income growth should lead to slower demand growth, while lower wage increases will ease pressure on business profit margins and reduce the need for businesses to charge higher prices. The labor market is characterized by a dynamic interaction between job creations, vacancies, voluntary departures (resignations) and dismissals. In the United States, job vacancies and the quit rate have started to decline and this momentum is expected to accelerate, leading to slower wage growth. The question remains how much this will reduce inflation, which is why Federal Reserve policy is completely dependent on data.

The US labor market is very tight. The unemployment rate is very low, the number of job vacancies is exceptionally high, job turnover as measured by the quit rate is also high, the monthly change in non-farm payrolls remains high despite the economic slowdown and, unsurprisingly , annual wage growth is strong, even more so for job changers.

A tight labor market is both a consequence and a cause of strong demand in the economy. This implies that it plays a crucial dual role in the central bank’s effort to bring inflation back to its target. On the one hand, slower wage growth should help dampen inflationary pressures because, ceteris paribus, it implies slower labor income growth. This should weigh on the economy’s final demand as well as labor demand, at least in some sectors. Additionally, lower wage increases will ease the pressure on corporate profit margins, reducing the need for businesses to charge higher prices. On the other hand, the slowdown in growth will weigh on the labor market via a slowdown in job creation and less wage growth.

The objective of a restrictive monetary policy is to lower inflation. To this end, inflation expectations need to be (re)aligned with the central bank’s inflation target and demand growth should slow. This is necessary to reduce the pricing power of firms and to limit wage growth. The latter is the result of a less dynamic labor market: vacancies and job opportunities are diminishing. It is unclear whether this inevitably requires a significant increase in the unemployment rate. The usual macroeconomic “workhorse” – the Phillips curve – suggests that a fall in underlying inflation is accompanied by a sharp rise in the unemployment rate because the curve is rather flat (Chart 1). However, recent observations are completely out of step with the “normal” relationship, making it difficult to assess what might happen in the future.

The question of the rising unemployment rate is linked to the question of a hard or soft landing. Federal Reserve Chairman Jerome Powell was very humble at his recent press conference in acknowledging that “we don’t know, no one knows if this process will lead to a recession or if so, how big a this recession.

The answer depends on how much tightening will be needed to bring inflation back to target. This is a function of the sensitivity of demand to higher interest rates and the influence of weaker demand on firm pricing decisions and on the labor market.

The latter is characterized by a dynamic interaction between job creations, vacancies, voluntary departures (resignations) and layoffs. These variables influence the pace of wage growth. During a recovery, the number of job offers and vacancies increases, creating upward pressure on wages, with the increase in wages of people who change jobs being greater than those of those who change jobs. do not change jobs (who stay in their job) (Charts 2 and 3). Consequently, the dropout rate increases (Chart 4). In a downturn, unfilled vacancies shrink, the wage growth gap between job changers and job stayers narrows, layoffs increase and, unsurprisingly in this riskier and less rewarding environment, the resignation rate is falling (Chart 5). Overall wage growth is also slowing. At present, we are only at the very beginning of this process – vacancies and the resignation rate have started to fall – but based on historical experience, we should expect that this dynamic is accelerating and that slower wage growth will contribute to lower inflation next year. The question remains, however, to what extent, which is why Federal Reserve policy is completely dependent on data.


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