Central banks are risking the best jobs market in a generation

If we were not constantly told otherwise, we would be celebrating the health of the labour market. The number of French, German, Canadian, Japanese, Dutch, Korean and Italian jobs as a share of working-age adults is higher than it has ever been. In the US, the UK and Spain the employment rate has only been higher than it is now at a few short moments in history — at the tail ends of long booms or recoveries in 2000, 2007 or 2019.

Workers dissatisfied with their job have also rarely had more vacancies to choose from. And just as one would expect in a market economy where employers are competing for workers, rather than workers competing for jobs, nominal wages are rising, also at record rates (though not fast enough to match supply shock-driven price spikes).

In short, workers in western countries are benefiting from the strongest labour markets in more than two decades, arguably in more than half a century. Yet our central bankers and other economic policymakers seem determined, even eager, to kill it. In fact, they may already have dealt it a fatal blow.

We know the justification, of course: that ending the jobs boom is necessary to bring down inflation. But this argument is heavy on the risk of letting high price growth persist and light to the point of obfuscation on the fallout from forcing price growth down. It glosses over just how good the labour market, which we seem about to sacrifice willingly, really is.

One can understand why employers might dislike a “shortage” of workers. It weakens their bargaining power. It could, if permitted to last, allow workers to take a slice of the economy’s value creation away from company owners. And it forces managers already struggling with rising input costs to find more productive ways to use staff they must pay more to hold on to. Employers who cannot up their productivity game are probably losing their workers to more productive rivals. Data from the US show job switchers’ wage growth outpacing those who stay put by the most since the late 1990s.

But government policymakers, including central bankers, are charged with protecting the public interest. This is not the same as, and may in fact run counter to, that which gives today’s business owners an easy life. A truly competitive capitalism does not do that.

Yet rather than welcoming the most worker-friendly labour market in generations as “strong”, central bankers are more likely to condemn it as “tight”. This would be an appropriate word for running out of workers. But most major economies keep pulling more people into work at an astonishing pace.

In the last quarter of available comparable data, just before the summer, the employment rate rose by 0.3 percentage points in the US and Canada, 0.4 in the EU and Japan and 0.6 in Korea. These blockbusting numbers tell of labour markets which are not tight, but responding to incentives. (In the UK, struggling with distinctive problems of its own, the rate has flatlined.)

But these millions of new jobs are being treated as bad news: the universal reaction to Friday’s solid US jobs data was an expectation of reinforced Federal Reserve hawkishness.

Let’s be frank: central bankers are about to address a cost of living shock by willingly inflicting a hit to growth and jobs that could go as far as causing a global recession. They claim this is preferable to the alternative. But they must spell out better why the alternative is so much worse. Their “credibility” is itself no more valuable than what it allows you to do.

If the aim is to avoid inflation settling at a moderately higher level, we need to be told why that is worse than giving up on a stellar jobs market. If it is to prevent a self-reinforcing dynamic in which wages and prices keep driving each other up, then truly independent central bankers should hold fire until they see the whites of the eyes of such a wage-price spiral.

Instead they increasingly leave an impression of buckling under political pressure that comes with high inflation reports today, which they cannot influence. Instead they should be focusing exclusively on the (much more benign) medium-term inflation outlook, which they can.

This approach of tightening monetary policy to counteract a huge supply-driven price shock may end in tears. If central banks are wrong, they will be criticised for having caused unforced hardship for millions of people worst placed to bear it, just when our geopolitical security requires popular unity. If they are right, it amounts to asserting that a strong labour market is too good a thing for workers to have. Either way, it is hard to see how our independent monetary policymakers come out of this crisis politically unscathed.

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