Fear of inflation vs fear of unemployment
The relationship of inflation to unemployment is top of the agenda in financial markets. Will slaying inflation, again, require high levels of unemployment? A stronger labour market may be a sign recession isn’t imminent but implies to many that interest rates will have to rise further to quell inflation, perhaps making for a worse, if later, recession.
Churn, people moving jobs, is key
The Phillips curve, the relationship between unemployment and inflation, has been much debated. The curve was assumed to have flattened, making inflation insensitive to unemployment. A steeper curve means more inflation at lower unemployment rates. Since 2020, the curve has re-steepened. Something different to the last 20 years is happening. A core driver appears to be churn in the labour market. More churn means more inflation as pay rises.
This seems to us a structural phenomenon
Working from home (WFH), or partial working from home, makes working further away easier. That means more job opportunities for candidates and more candidates for opportunities. Zoom and MS Teams make the hiring process easier, quicker and more private. Workers want WFH or a hybrid of it. This potentially means the labour market has become more efficient, and faster moving. It won’t stop labour markets being cyclical but the structural forces seem unlikely to reverse.
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