The global financial crisis and its aftermath have had a profound effect on Organsisation for Economic Co-operation and Development (OECD) labour markets. Nearly seven years since the crisis began, only four of the thirty countries, for which comparable data currently exists, have an unemployment rate below its 2007 level – Germany, Israel, Japan, and Poland. Six countries – Ireland, Italy, the Netherlands, Portugal, Slovenia and Spain—have an unemployment rate more than 3 percentage points (ppts) above its 2007 level. For the average OECD country, the unemployment rate is currently 1.6ppts higher than in 2007. These unemployment trends help explain the current accommodative stance of monetary policy across the developed world.
However, when considering the appropriate level of interest rates or balance sheet size, it is not enough to compare current unemployment rates with their pre-crisis levels. Not only may unemployment rates have been unsustainably low before the crisis but structural changes in the labour market since the crisis may have raised the natural rate of unemployment.
Both would imply that there is less slack in labour markets than the simple change in unemployment might otherwise suggest (see Chart 1). Take the example of Spain; the unemployment rate is currently just under 24%, which is 15.6ppts above its 2007 level. But the OECD also estimates that Spanish unemployment was below its natural level in 2007 and that the structural rate of unemployment has increased by around 5 ppts since then. That implies that the current unemployment gap may only be around 5%. The OECD has reached a similar conclusion for the Eurozone as a whole, with the unemployment rate sitting only 1.6ppts above its structural level.
If the OECD is correct – and admittedly there is a wide range of confidencearound their estimates- Eurozone inflation might begin rising earlier than the market assumes. Labour market conditions in the UK and US are pointing to the need to begin normalising policy, although both central banks appear keen to test the speed limits of growth. In Japan, the unemployment rate may actually be below its natural level, though the persistent failure of wage growth and inflation to accelerate means that policy must remain highly accommodative for some time yet.
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Source: Standard Life
