[infogram id=”ec1e8adb-4f64-4b75-95b4-8f471f438ae0″ prefix=”VIR” format=”interactive” title=”Figure 1: Beveridge Curves”]
A comparison of Beveridge curves in the Eurozone and the US shows how, while in Euro countries a return to the pre-Covid pattern is in progress, in the US the curve still displays a significant shift towards an equilibrium where higher unemployment and higher vacancies keep coexisting. This dynamic suggests that strong frictions continue to characterize the US labour market: not only job matching is becoming increasingly complex, but the curve also became particularly steep in latest months, signaling significant difficulties for firms in finding new workers. While this might be interpreted as a symptom of a strong recovery, it should be considered that employment still remains well below trend, thus indicating how frictions seem to be more a consequence of certain economic policies, rather than a sign of an economy running at full potential.
[infogram id=”d438d746-1a97-4ec7-a17c-b640776e7fb1″ prefix=”hRc” format=”interactive” title=”Figure 2: Employment”]
Both the US and the Eurozone job markets are still short of trend in terms of employment, missing respectively 6.3% and 4.1% of potential employment. Such relatively better performance of the Euro Area stems from the implementation of job retention schemes, since in terms of aggregate hours worked the US has shown a faster recovery. To better grasp how the two recoveries differ we implement a simplified SVAR decomposition of supply & demand of labour based on changes in hours and wages[1]. The model indicates that, while in the Eurozone workers’ labour supply has been the main driver, the opposite was true for the US, where the initial Covid negative shock was also felt harder. This implies that while in Europe workers who had temporarily abandoned the labour force in the initial phases of the pandemics have driven the recovery by returning on the job market, in the United States the dominant factor remains that firms are struggling to fill vacancies, as signaled by the fact that the labour demand shock of the reopening still outweighs prospective employees demand for jobs
[infogram id=”2d144790-e556-4111-baeb-47564da095a9″ prefix=”cxX” format=”interactive” title=”Figure 3: Supply & Demand Shocks”]
Such results would suggest a potentially overheating US job market. In support of this argument, by annualizing seasonally adjusted changes observed in Q1 it can be seen how US wages are running at a significantly higher pace compared to previous years, while in Europe labour cost growth is still subdued.
[infogram id=”db70fdd3-d917-43cf-ac8e-2f93e5a3a444″ prefix=”jt3″ format=”interactive” title=”Figure 4: Wages”]
This also translates to higher producer prices: since the beginning of 2002, the United States have cumulated a wedge of 3.5% in such index with respect to the Euro Area.
[infogram id=”78e4c30e-57c4-42ec-80e3-83044a5fbeb4″ prefix=”U69″ format=”interactive” title=”Figure 5: PPI”]
Still, a note of caution is due: it should be noted that up to now the main driver of PPI seem to have been commodity prices, which show a higher correlation with Producer Prices than Labour Costs in both economies[2]:
[infogram id=”77688168-6fb1-4e90-b9c0-788225734940″ prefix=”FIE” format=”interactive” title=”Table 1: PPI Correlations”]
Overall, the US job market displays significant symptoms of constraints and overheating, with high matching frictions, slower employment recovery, accelerating wages, and higher production prices. While part of the pressure on producer prices might be justified by higher commodity prices, the fact that the Eurozone did not show such strong signs of job market disruptions, while displaying a more orderly recovery, should sound a note of warning. Fiscal policies enacted to counter the Covid crisis and support US households were probably a necessity during the pandemics but might become a double-edge sword now that large part of the population has received vaccinations, potentially triggering a wage-price spiral. It remains to be seen whether the fact that 25 states have announced that they would end the enhanced benefits ahead of the scheduled expiry in September and that Covid-related policy restrictions are being lifted will prove sufficient to remove bottlenecks and cool down the US labour market.
[1] See Brinca et al. (2020) for methodology.
[2] Commodities prices as proxied by the IMF Primary Commodity Price Index; Labour Cost as proxied by LCI for Eurozone, Total Compensation for US.
