ARE TIGHTER LABOUR MARKETS NOW A PERMANENT FEATURE?

The current inflationary pressures in the global economy have a number of causes. By far the most serious would be a much tighter labour market. Below we look at whether this could become a permanent feature of the global economy.

Current inflationary pressures in the global economy are being driven by three main causes: excess demand as lockdown savings are spent, supply chain disruptions associated with the pandemic and reduced labour supply. Whilst the first two are likely to fade over the next year or two it is possible that the third could continue for many years. This is crucial as accelerating wages are one of the main driving forces behind a shift to higher inflation.

In the Eurozone the supply of labour has recovered pretty fast from the depths of the pandemic. However, in the US and the UK labour is difficult to come by and job vacancies stand at a record. This seems to reflect the fact that the trials and tribulations of the pandemic have triggered a wave of early retirements amongst Baby Boomers. For example, it is estimated that over half of the four million workers who have left the US labour market over the last eighteen months are people to have chosen to retire earlier than they otherwise would. Tighter immigration rules after 2016, in both the UK and the US, have also taken their toll. In the UK it is estimated that the combination of EU workers returning home post Brexit and fewer new arrivals may have shrunk the UK workforce by around 3%. All this has meant that US and UK workers do now have some bargaining power with wages growing at an underlying 3-4% per annum.

So, on the assumption that US and UK immigration remains curtailed it looks like workers will be in a stronger negotiating position than they have been for several decades. This suggests higher wage growth and firmer underlying inflationary pressure from the labour markets.

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This post was written by Robin