Roller Coaster Unemployment Rate Ride: At an All-time Low in EMU

The unemployment rate in the European Monetary Union in November 2023 is tied for its all-time low, a low reached in June 2023. The percentile standing of the unemployment rate puts it in its 0.3 percentile, lower than any of the EMU countries in the table. Within the Monetary Union, Belgium's unemployment rate stands at its 10.8 percentile, the same as Germany’s. In France the unemployment rate has a 6.4 percentile standing, and the Dutch unemployment rate has a 9.3 percentile standing. The United States where the unemployment rate is within a stone’s throw of a 50-year low is at its 8.4-percentile. Japan, that chronically runs very low unemployment rates, has its rate at its 16.5 percentile.

Historically low rates of unemployment- The only entries in the table with unemployment rate above their historic median are the United Kingdom where the claimant rate is at its 61.6 percentile. The European Monetary Union member country that has an above-median unemployment rate is Luxembourg, a very small country with the concentration of jobs in the services sector and in the financial sector. Its unemployment rate has an 81.7 percentile standing, although it has the sixth lowest reported unemployment rate among the twelve countries in the table. Traditionally, Luxembourg has run a relative low rate of unemployment, that accounts for the relatively high standing of a union-wide moderate unemployment rate.

The EMU rate falls on balance over 12-months- The unemployment rate for the European Monetary Union in November has fallen over 12 months by 0.3 percentage points while looking at the member countries on the table only five of twelve countries in the table have seen their own unemployment rates fall over 12 months. This EMU-wide rate falls because countries with falling unemployment rates generally had relatively sizable drops over 12 months while the large countries reporting in the table such as Germany and France and moderately sized Portugal, each had an unemployment rate increase of just 0.1 percentage point over 12 months.

Still, rate declines appear to less common- However, looking at monthly patterns, we see four countries with unemployment rates declining in November, only three with the unemployment rates declining in October, and only one with employment rate declining in September. Unemployment rates were unchanged in November in four countries, in October six countries had unemployment rates unchanged from their level in September, and in September six countries had unemployment rate levels unchanged from their level in August. The declines in the unemployment rate are becoming rarer in the monetary union and that's not surprising when looking at the historic rankings and the current low levels of unemployment rates.

Paradox of the lower EMU standing than for any member country- The unemployment rate and the monetary union has a much lower ranking than for individual member countries because it's the coincidence of having low rates and all the countries. That synchronization is responsible for making the EMU overall unemployment rate rank so low. Having only the smallest country listed in the table with an unemployment rate above its median clearly underscores how widespread low unemployment has become across the monetary union.

A Difficult Situation for Monetary Policy Two peas in an uncomfortable pod- This situation also puts the European Monetary Union in the same situation as the U.S., where both countries/regions have over the top inflation rates and yet they continue to have extremely low rates of unemployment. While the ranking for the U.S. unemployment rate is not as low as the ranking for the monetary union, the level of the unemployment rate in the U.S. is not far from its fifty-year low, so in practical terms their positions are really quite similar. In the U.S. the inflation rate has dropped faster in the last several months while inflation overshooting continues in both the U.S. and the EMU. Markets are becoming strongly poised for rate reductions in the U.S., as soon as May, while the ECB has given markets no guidance about its willingness to cut rates anytime soon.

Policy complications- The monetary policy choices now are complicated by geopolitical conditions that have placed a war between Ukraine and Russia right on Europe's doorstep and brought, new, warlike conditions between the Israelis and Hamas to then Middle East. In addition to those conditions, the United States faces an election cycle. Both countries/regions are also making policy coming out of a period of having badly missed inflation targets by allowing inflation to climb strongly and rise significantly above their 2% inflation targets.

Wild money supply fluctuations as well- There is an abundance of reasons that monetary policy is difficult to handicap in this cycle, particularly because we are also coming out of the COVID. There had been a tremendous amount of fiscal stimulus and government interference in the private sectors and all these economies. All experienced substantial excesses of money supply growth within the past few years although money supply growth is now decelerating in the monetary union as well as in the U.S. where the prime monetary aggregate, M2, is now shrinking year-over-year.

The unemployment rate is front and center as an issue- The Federal Reserve is conducting policy in a manner to try to preserve the low unemployment rate or at least have as little impact on it as possible as it gets inflation under control. The question that these central banks have yet to answer is this: if they are successful in bringing inflation down close to the target and not raising the unemployment rates, and do it by reducing interest rates…what do they do for Plan B? What I focus on here is that in lowering rates they would have put a new slug of stimulus into their economies, they would already have unemployment rates that don't indicate much slack in the economy, and it's not clear that in the case of the Federal Reserve, at least, that it would have achieved its inflation target. That would remain a forecast. The Federal Reserve has stated that its policy is not to wait until inflation gets to 2% to cut rates; instead, it will ‘anticipate’ that inflation will eventually go down to that level. But the same question applies to both the Federal Reserve and to the ECB - and that question is: how committed are they really to this 2% target? And how soon are they willing to make it happen? And what price will they pay to get there? If global economic conditions are still tight, and global labor markets are still tight, how does cutting interest rates with inflation still above target after a long period of inflation overshoots wind up getting inflation down to your lower target range given ongoing tight labor market conditions? The logic, let alone the economics of the situation escape me. There seems to be a good dollop of wishful thinking going on at central banks. And in the case of the U.S., it has the political impact of pushing any further interest rate increases or of having the deal with monetary policy mistakes out to the period after the 2024 presidential elections…mission accomplished?

Issues over upcoming stimulus as well- Political statements from ‘The West’ continue to come out in clear ringing support of Ukraine. But the will to continue to provide money and arms at the previous pace has clearly dissipated and while the U.S. denies that developments and Israel will have any impact on their support or funding of Ukraine it's quite clear in the House of Representatives that simply is not true. And if the U.S. is going to step back its support, there will be a greater burden placed upon Europe. Will Europe step up to pick up the slack? If it does, will it be creating more stimulus for its economy or will it fund its contribution to the war effort by raising taxes? The latter tactic seems less likely and that simply means that there is another lurking potentially inflationary force in the background as we ponder where we're headed in 2024 and remain unclear of central bankers’ commitment to their inflation targets. After all, talk is cheap, even when it is clear.