Unemployment Rates Remain Low But They Are Not Falling As Much Any More

Unemployment in the European Monetary Union (EMU) held at 6.4% in June, a level that has been stable for three months running. In June, for a group of 12 of some of the oldest EMU members, the unemployment rate at the country level fell for three members: in Italy, Spain, and Greece. The unemployment rate rose month-to-month in Austria, Finland, and Luxembourg. This compares to May when the unemployment rate fell in five of the reporting members and in April when the unemployment rate fell in six of these members.

Which way does the trend blow? While there has been some enthusiasm recently about some improved economic data, particularly in the United States, where data have shown some firmness and inflation has been tempered, the unemployment rates in the European Monetary Union are showing signs of running out of gas when it comes to moving to lower levels. The question at hand is: are things getting better or is the improving trend ending?

Looking at the changes over various periods over 12 months, 6 months and 3 months, we find that unemployment rates have fallen on balance over three months in five EMU members; over 6 months they've declined for seven members; and over 12 months they've declined for six members. By comparison, unemployment rates have risen over 12 months for five members; they rose over 6 months for only two members; and they've risen over 3 months for five members. There's a little bit more back and forth in the changes in unemployment rates compared to the preponderance of declines that used to dominate the trends.

No real back-tracking yet However, what we're seeing for the most part is simply a slowdown in the decline of the unemployment rate while unemployment rates themselves remain at extremely low historic levels. The unemployment rate for the Monetary Union itself has been lower only 0.7% of the time. Across Monetary Union members, only two members have unemployment rates that are above their median and that includes Luxembourg and Austria. On the other hand, Germany has an unemployment rate that has been lower only 5.8% of the time. France has an employment rate that has been lower only 2.6% of the time. Ireland has an unemployment rate that's been lower only 0.3% of the time and the Netherlands has an unemployment rate that has been lower only 9% of the time. There are far more countries with extremely low rates of unemployment than there are countries with unemployment rates above their historic medians. Still, only Ireland is at an historic low rate; Germany and France are above their lows by 0.1 percentage points. But, on average, the unemployment rate low is 1.5 percentage points lower across these 12 members.

Comparing the European Monetary Union to the United States, the United Kingdom, and Japan (using the claimant rate for the U.K. to bring the data up to date), we find more backtracking in this group recently than we do in the Monetary Union itself. The U.S. shows the unemployment rate higher on balance over 3 and 6 months. The U.K. shows the claimant rate higher over 3, 6 and 12 months. Japan’s unemployment rate is higher over 12 months and 6 months but then lower over 3 months. The U.S. has an unemployment rate that has been lower only 5.8% of the time, Japan’s rate has been lower 15.5% of the time, while in the U.K. unemployment rate has been lower 60.2% of the time (based on the claimant rate).

There continues to be uncertainty about the outlook. Inflation remains high everywhere - too high everywhere – but in the U.S., there has been a break in inflation that has created some optimism and in the U.S. the economists at the central bank have taken their forecast of recession off the table. The Fed Chair talks a lot about the possibility of achieving a soft landing and the Federal Reserve clearly seeks to run policy in this cycle differently than in the past; it is looking for a level for the federal funds rate that it thinks will contain and reduce the inflation rate and go easy on the economy.

However, at this time the ongoing U.S. discussion of policy that is unclear is how long the Federal Reserve is going to be willing to let the inflation rate remain above its 2% target as it tries to compromise between mitigating the impact on the real economy and on reaching its inflation target of 2%. Neither the Fed nor the ECB has been quick to hike rates to get inflation back to target. The dark side of the Fed is that it has been wildly optimistic compared to what's happened. The ECB has simply been tolerant of its overshoot. Federal Reserve officials have been less than forthcoming about how soon they think inflation is going to return to the 2% pace. The Fed has a newfound emphasis on mitigating economic disruption.

A new trick for the old dog? For the record since the 1960s at least, the Federal Reserve has no record of having tamed an excessive inflation rate without having a recession. In fact, the Fed has a considerable record of having run recessions that did not tame inflation because the central bank was unwilling to hold interest rates high enough long enough which seems to me to put those failed recessions in the same camp as a Federal Reserve that's seeking to have a soft landing. A soft landing would certainly be a recession that ends with unfinished business that is without the inflation rate returned to 2%.

The global scene If the U.S. is leading global policy in this area, we have to be concerned about what happens to inflation in the period ahead because if central banks and their business cycles end early without getting inflation back to target, we will face similar macroeconomic conditions around the world with inflation elevated above targets and without having created any real slack in the local economies which means labor markets will still be relatively tight. We have seen what happens in the United States when labor markets remain tight. We are currently seeing collective bargaining agreements reaching for bigger pay increases as workers try to get back what they lost during the recent episode of inflation. In the U.K. the central bank has warned labor that if it tries to get back what it's lost in the recession it will create more inflation. But if slack isn't created by a recession or ‘a significant lasting slowdown’ the situation will arise in which there will be labor market and capacity pressures and an ongoing legacy of inflation that's ‘already’ too high.

Global angst This is the description of the global economy clearly won't be a global economy in which one can expect international competition to drive inflation down; macroeconomic conditions will be driving inflation up not down. One saving grace is that China is experiencing weakness and there's even some talk of China experiencing some deflation and that's a big economy that has had a big influence on pricing globally in the past. However, supply chains have been moving away from China because it was unreliable during the pandemic. It's not clear to me that China will play the same role in the period ahead that it has over the last 20 or 30 years.

Is a malleable, flexible, goal a target at all? In short, if central bankers are not going to pay attention to their mandates and if they're not going to achieve their inflation targets in relatively short order and take the steps that are necessary to do that, we are going to be living in a very difficult world in the period after the ‘soft-landing.’ We may decide after that calling such an episode a ‘soft-landing’ wasn't such a good idea because nothing is going to land in the future; we'll have nothing that's soft. Central bank policy cannot be involved doing anything that's called soft. When central bankers are soft, it means they aren't making hard choices. The job of the central bank is to make the hard choices. And in the U.S., political pressures have been brought to bear on the central bank that have moved it away from its historic choices. The central bank in the U.S. has a dual mandate and, in some sense, it therefore is not a true inflation-targeting central bank.

The way we were... In the late 70s and early 80s under Paul Volcker, that Chairman argued that the central bank did the most it could for creating maximum employment by controlling inflation. The Volcker tactic was to create a long-term goal for employment and for inflation that caused the rift in policy between those two goals to disappear. Under Powell the opposite choice was made as the policy schism was reincarnated. Separate inflation and employment pledges seem to have been made and Powell’s Fed has prioritized the job market. How can a central bank be successful if it does that? What’s next? Is the U.S. labor department going to set a goal for 2% inflation?