The Economist-Why arent more people being sacked Finance economics

Central bankers started to raise rates at a time when demand for labour had almost never been so strong (see chart 1). Last year the unemployment rate across the oecd club of mostly rich countries, measuring the share of people in the labour force who would like a job, was a shade under 5%, close to an all-time low. Excess demand for labour showed up in a surge in unfilled vacancies, which reached an all-time high. Workers bargained for higher wages, knowing that they had plenty of options.

The scale of the task central bankers set themselves was illustrated by history. Research by Alex Domash and Larry Summers, both of Harvard University, found that there had never been an instance in which the American vacancy rate had fallen substantially without unemployment rising significantly. Last year Michael Feroli of JPMorgan Chase, a bank, studied the record and noted that “whenever the vacancy rate goes down a little it goes down a lot, and the economy lands in recession.”

To assess progress in rich-world labour markets, we have assembled data from the oecd and Indeed, a listings website, covering 16 countries. In this group, employers have reduced open vacancies by more than 20% on average from their peak—a historically rapid decline. Some countries, such as France, have seen relatively modest falls of 10% or so. In others, such as Canada, Japan and Switzerland, unfilled job postings are down by a quarter or more.

Declining vacancies are helping trim wage growth. In America the annual rate of pay rises has slipped from 6% in late 2022 to below 5% today (see chart 2). Canadian wage growth is also falling fast. The story is less clear elsewhere, not least because the quality of the earnings data is worse. In Germany and Italy wage growth has probably stopped rising, though there remain pockets of concern, including in Britain—which might explain why the Bank of England, which also meets this week, is expected to raise rates again.

For policymakers, this success would feel a little soiled if it came with a sharp rise in joblessness. According to rules of thumb for America discussed by Messrs Domash and Summers, in normal times you would expect a 20%-plus fall in vacancies to come alongside a rise in unemployment of three or so percentage points within a year.

In reality, a year or so after vacancies started heading down, something else appears to be happening. Recently the unemployment rate in the oecd has held steady. Job growth, at 500,000 a month across the rich world, is about as fast as it was in the second half of last year. The working-age employment rate—the share of people aged 16-64 who are actually in a job—has risen to an all-time high in around half of oecd countries. Even places known for high unemployment, such as Italy and Portugal, have found jobs for an unprecedented share of their working-age population.

Why are labour markets breaking the historical rule? One possibility relates to “the great resignation” during covid-19. In 2021, spooked by stories of employees quitting to start crypto firms and write novels, some employers may have put up job vacancies as an insurance policy. Now, as fewer folk quit their jobs, they are taking them down again.