Now Hiring signs have become a common sight in front of restaurants in Rehoboth Beach, Delaware. The labor shortage, which has been a major problem since the start of the Covid-19 pandemic, is expected to improve this year. Despite aggressive tightening of monetary policy by central banks worldwide, labor markets have remained tight. The latest U.S. jobs report showed that this trend continued in April, with an increase in nonfarm payrolls and a historically low unemployment rate. This tightness is also seen in many other advanced economies, leading to a divided opinion on when central banks like the Federal Reserve, the European Central Bank, and the Bank of England will be able to pause or reduce interest rates. Moody’s predicts that the gap between labor supply and demand will narrow in G-20 economies this year, easing the tight labor market as growth slows and the impact of tightening financial conditions and cyclical demand for workers recedes.
In mid-2022, supply chain shortages transitioned to an excess of goods and materials for retailers and manufacturers. Jeffrey Kleintop, chief global investment strategist at Charles Schwab, expects a similar reversal in the labor market later in 2023, as the impact of monetary policy tightening takes hold. Kleintop points out that there has been an increase in job cuts mentioned in company communications, indicating a shift from labor shortages. Tighter lending conditions are also contributing to a weaker jobs outlook. Moody’s suggests that falling demand for labor and rising borrowing costs will drive further reversals in the labor market over the next few quarters. However, there is also expected to be modest growth in labor supply due to higher participation rates from younger workers and the fading of pandemic-related frictions. The services sector has played a crucial role in maintaining labor market resilience, with strong job growth. The widening gap between growth in services and weakness in manufacturing suggests an imbalance that may need to be corrected.
The shift from labor shortages to excess supply may allow central banks to adopt a more dovish stance, but it may not be fast enough to significantly bring down core inflation by year-end. Moody’s warns that while labor shortages are expected to subside this year, they could resurface in the future if meaningful policy action is not taken to grow the size and productivity of the labor force. Aging populations are causing a decline in available labor supply, particularly in countries like South Korea, Germany, and the U.S. Policy measures such as encouraging immigration, female labor participation, and the adoption of productivity-enhancing technologies will determine the extent and persistence of labor supply challenges. Without these measures, hiring challenges could re-emerge in the next business cycle.
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