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Central banks are risking the best job market in a generation

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If we are not constantly told otherwise, we will celebrate the health of the labor market. The number of French, German, Canadian, Japanese, Dutch, Korean and Italian jobs as a share of working-age adults is higher than ever before. In the US, UK and Spain, employment has only been higher than it is now in a few short moments in history – at the end of long booms or booms in 2000, 2007 or 2019.

Workers who are dissatisfied with their jobs rarely have more vacancies to choose from. Just as one would expect in a market economy where employers compete for workers, rather than workers for jobs, nominal wages are rising, too, at record rates (although not fast enough to keep up with the shock-triggered price hikes).

In short, workers in Western countries have benefited from the strongest labor markets for more than two decades, arguably for more than half a century. after our Central bankers Other economic policymakers seem determined, even anxious, to eliminate it. In fact, they might have already dealt her a fatal blow.

We know the rationale, of course: that ending the job boom is necessary to bring down inflation. But this argument is heavy on the risks of letting high price growth continue and so light that it obfuscates the implications of forcing price growth lower. It sheds light on how good the job market, which we seem to be willing to sacrifice, really is.

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One can understand why employers might hate the “shortage” of workers. It weakens their bargaining power. It could, if allowed to last, let the workers take a slice of EconomieCreating value away from the owners of the company. It forces managers who are already struggling with rising input costs to find more productive ways to use the employees they have to pay more to retain. Employers who cannot raise their productivity may lose their workers to more productive competitors. Data from the United States shows that the wage growth of people who change jobs has outpaced those who stay higher since the late 1990s.

But government policy makers, including central bankers, are tasked with protecting the public interest. This is not the same, and may in fact contradict, what gives today’s business owners an easy life. True competitive capitalism does not.

However, rather than hailing a labor market that has been more worker-friendly for generations as “strong”, central bankers are likely to condemn it as “strict”. That would be the right word to run out of workers. But most major economies continue to attract more people to work at an astonishing pace.

In the last quarter of available comparable data, just before the summer, the employment rate rose by 0.3 percentage points in the United States and Canada, 0.4 in the European Union and Japan and 0.6 in Korea. These huge numbers tell us about labor markets that are not tight but respond to incentives. (In the UK, which is struggling with its own distinct problems, price has stopped working.)

But these millions of new jobs are being treated as bad news: the global reaction to Friday’s strong US jobs data was an anticipation of a further tightening of the Federal Reserve.

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Let’s be frank: Central bankers are on the cusp of addressing the cost-of-living shock by voluntarily harming growth and jobs that could amount to a global recession. They claim that this is better than the alternative. But they should better explain why the alternative is so much worse. Their “credibility” in and of itself is no more valuable than what they allow you to do.

If the goal is to avoid stabilizing inflation at a moderately higher level, we need to be told why that is worse than giving up on a stellar job market. If it’s about preventing a self-reinforcing dynamic where wages and prices keep pushing each other, truly independent central bankers should hold fire until white eyes see such a wage-price spiral.

Instead, they are increasingly making the impression of regressing under the political pressure that comes with today’s soaring inflation reports, which they cannot influence. Instead, they should focus exclusively on the (more moderate) medium-term inflation outlook, which they can do.

This approach of tightening monetary policy to counteract the huge supply-driven price shock may end in tears. If central banks are wrong, they will be criticized for causing non-enforced suffering to millions of people who are worse off to bear it, only when our geopolitical security requires popular unity. If they are right, it amounts to emphasizing that a strong labor market is a very good thing for workers. Either way, it is hard to see how independent monetary policymakers will emerge from this crisis politically unscathed.

martin.sandbu@ft.com

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What’s next for the industry in Europe?

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This article is an on-site version of Martin Sandbo’s Free Lunch Handout. Participation over here Get our newsletter sent straight to your inbox every Thursday

The impact of the energy crisis on European industry is still hotly debated. when highlighted in Free lunch last week How well industrialization has held up on the continent, reactions have varied from denial to surprised delight. as economics professor Daniela Gabor he said in a tweet Echoing how I feel, “I was so gloomy about carbon shock therapy—and so far, so wrong. That’s nice.”

This, of course, is not how many European leaders see this. Instead, high energy prices are seen as an existential threat to the industrial base, which, moreover, is being lured away—the argument goes—by unfair US green subsidies. (“We wanted you to take climate change seriously but not so much that your companies produce green technology in competition with us,” seems to be the view of some.) He was guided by a series of promises, from reassurances That Washington will adjust its policies so as to leave the European industry unharmed, to Commitment to larger subsidies at home.

As the controversy continues, it couldn’t hurt to dive back into the data and what it should mean for policy.

Start with Europe’s remarkable resilience to rising natural gas prices. My colleague Shotaro Tani added to the evidence of this, reporting on Monday that European users Reduce consumption by a quarter in October and November, compared to five-year averages. This is largely due to lower industrial demand for gas.

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Gas demand in Europe has fallen rapidly

Some of the reactions to my celebration of this success have come from the angle of climate change. They argue that the gas cuts were only achieved at the cost of consuming more oil, or replacing coal with gas in power generation. So I went to look at the data, and I can reassure the skeptics. The diagram is shown below European Union imports of oilwhich looks pretty flat this year and is, if anything, below pre-pandemic levels.

Monthly EU imports of crude oil

And while there have been reports of increased coal use, the numbers are clearly not enough to move the needle across the economy as a whole. Here is a scheme coal consumption in electricity generation in the European Union. Again, it is still below pre-pandemic levels.

Monthly use of coal in electricity generation in the European Union

Others resist the explanation that European industry has weathered the crisis well, as I argued last week. There are certainly reports of some production being halted. [German chemicals group BASF is a case in point.] But this must be seen against a general background growth in production in factories in nearly every European country, as I documented last week.

For more details, take the latest industry figures from Germany. Industry excluding energy and construction – which relies heavily on manufacturing – produced 0.8 percent more in October than a year earlier. Within this, the “energy-intensive branches” recorded a decline of 12.6 percent over the year (these are five sectors that account for a fifth of the value added in the industry but three-quarters of its energy use). So manufacturing that uses a lot of energy has shrunk sharply, other manufacturing has grown, combined growth has been positive — it all sounds like exactly how we want an adaptive capitalist market economy to behave.

Finally, some object to comparing factory production today to last year, given how the pandemic has turned our economies upside down. fair enough. But taking a long view certainly means focusing on the fact that I highlighted last week, which is that EU manufacturing output is greater than ever. If this is a crisis, it is not a bad crisis.

Admittedly, it was an unexpected situation. So it’s only natural to be overwhelmed by a better-than-you-think-the-stats-telling story (I certainly was, as I expected things to be worse). But it is not healthy for public discussion to be confused with thoughts of what (as I am Mark Twain’s face In another context) we know for sure that it is not.

Take diffuse anxiety (prominently described by my colleagues in Energy Source Newsletterwhose chart is reproduced below) that the US is stealing Europe’s bacon, or at least its investments in batteries and other technologies of the future.

Bar chart of estimated capital investment ($billion) showing EU investment in US electric vehicles and battery manufacturing by year

But there seem to be similar concerns about Chinese companies Build a lot of battery factories in Europe. Can you really complain about both things at the same time? Maybe this is just a story about business leaders building batteries wherever there’s a demand for them – which now includes the US, and obviously hasn’t stopped including Europe. The most and the merrier.

Of course, one might think that for reasons of “strategic autonomy” European demand for batteries would be better met by European-owned or European-controlled battery production located in Europe. But if that’s the case, it’s a little rich to complain about the US trying to do just that with the clumsy discriminatory tax breaks that European leaders stir up.

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What is the most obvious way to think about the future of the green industry in Europe? I had a stab in my stomach Monday column, where she argued that the EU should draw the conclusion that it is a fossil-energy-poor continent: that it not try to maintain a fossil-energy-intensive industry. Instead, focus on accelerating the green transition, massive expansion of renewable energy generation and transmission, and developing an industry that can thrive in the renewable energy system. This could mean pursuing production methods that are adaptable to the vagaries of renewable energy – from adapting production stages to different energy needs with energy price fluctuations to integrating thermal storage and energy storage into plant facilities.

It was a pleasure to read a perforated editorial In our pages by Fatih Birol, head of the International Energy Agency, he argues along similar lines: Europe must face structurally higher fossil fuel prices, but it has a chance to build an industry geared towards a decarbonized economy. But this requires a “master plan for the future that goes beyond survival mode”.

Finally, read the careful analysis by George Riklis and Philip Losberg of the Center for European Policy. claim to The new EU funding mechanism is worth a trillion euros On the basis of co-borrowing. One can argue about the details. But this is the level of ambition required.

Other readings

  • Ukraine’s President Volodymyr Zelensky is the Financial Times’ Person of the Year. Our editor went to Interview with him.

  • This week, the European Union began banning the import of Russian oil, and the Union and the Group of Seven countries imposed a ceiling on the prices of Russian oil sold anywhere in the world with the help of their companies. Declaration of the European Union over here and a US Treasury fact sheet over here.

  • The cost of living is a crisis Drive more women into sex work.

  • The EU-Western Balkans summit took place in Tirana this week. in New reportThe Vienna Institute for International Economic Studies shows that it is time for the European Union to start taking the region seriously and accelerate its integration with the bloc.

  • Bank for International Settlements Warns of market crashes It could complicate monetary policy tightening.

news figures

  • The share of profits of multinational corporations in tax havens has vanished did not fall After policymakers began to address the problem after 2015, new research has come to the fore. As global profits have continued to rise, so have the associated tax losses.

  • British Healthy life expectancy is getting worsewrites Sarah O’Connor.

Lex newsletter – Follow a message from Lex hubs around the world every Wednesday, and review the best comment of the week every Friday. Participation over here

without hedging Robert Armstrong explains the most important market trends and discusses how the best minds on Wall Street respond to them. Participation over here

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Volkswagen expects tough 2023 for financial services unit via Reuters

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© Reuters. FILE PHOTO: The logo of German automaker Volkswagen is seen on a lid in the showroom of a Volkswagen dealership in Brussels, Belgium, July 9, 2020. REUTERS/François Lenoir/File Photo

(Reuters) – Volkswagen (ETR) expects a tough 2023 for its financial services unit on the back of an economic slowdown, rising energy prices and rising interest rates.

“We see that people are more cautious because of the recession forecast, and we don’t sell a lot of cars,” Frank Fiedler, chief financial officer of Volkswagen Financial Services, said in Braunschweig on Wednesday night.

He said higher interest rates could weigh on earnings next year, adding that the Volkswagen unit cannot make concrete forecasts for its operating profit yet.

The financial unit continues to benefit from higher used car prices and lower credit costs and residual value risks in the current year. Fiedler said operating profit should be between 5 billion and 5.5 billion euros.

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This compares with a previous forecast of around 5 billion euros and an operating profit of 5.7 billion euros in 2021.

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Systemic inflation drivers (and what to do about them)

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In the constant pursuit of writing about all the interesting stuff FTX’s shit vortex has swirled in recent weeks, it’s time to turn to Brilliant paper On “systemically important” inflation.

In other words, not all price increases are equal. Some are much more influential for overall inflation rates than their weights would imply, because of their role as inputs to sectors of the broader economy.

This makes intuitive sense. But perhaps more importantly, many of these systemically important rates are actually difficult, if not impossible, for monetary policy to influence, and require more subtle repressive partial policy responses.

Here is the summary from paper Written by Isabella Weber, Jesus Lara Jauregui, Lucas Teixeira, and Luisa Nassif Perez:

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In the overlapping global emergencies of pandemic, climate change, and geopolitical confrontations, supply shocks have become frequent and inflation has returned. This raises the question of how sector-specific shocks relate to price stability in general. This paper simulates price shocks in the input-output model to identify sectors that present systemic vulnerabilities to monetary stability in the United States. We call these prices systemic importance.

In our simulations, we found that the average of pre-pandemic price fluctuations, the price shocks of COVID-19, and inflation in the Ukraine war yield a nearly identical set of systemically significant prices. Sectors with important prices are systematically divided into three groups: energy, basic production inputs other than energy, basic necessities, and trade and financial infrastructure. Specifically, they are “oil and coal products,” “oil and gas extraction,” “utilities,” “chemical products,” “farms,” “food, beverages, and tobacco products,” “housing,” and “wholesale trade.” “.

We argue that in times of overlapping emergencies, economic stability needs to override monetary policy and requires institutions and policies that can target these systemically important sectors.

This runs counter to the popular economic orthodoxy that inflation is a purely macroeconomic issue, and monetary policy is the best—perhaps only—tool for addressing it.

As Milton Friedman’s wearisomely repeated quote says, “Inflation is always and everywhere a monetary phenomenon.” As the paper points out, even New Keynesians see it as a product of aggregate demand and capacity utilization. But wars, droughts and trade squabbles are hard for central banks to resolve.

Economists simulated shocks to each of the 71 industries in the US Bureau of Economic Analysis’s input-output table, using shifts in prices between 2000 and 2019 to identify “system important” drivers of headline inflation. This is what they found:

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As you might expect, the food and energy industries are the most important direct and indirect drivers of inflation. So even if you use a “core” CPI measure that strips them away, their impact will still be significant. It is questionable to what extent monetary policy can really affect demand for it.

The implications for today are very clear. If monetary policy has limited effect on these systemically important drivers of inflation, should central banks really be overcompensating, aggressively increasing rates and destroying demand to cut all other rates – no matter what the economic cost?

Isabella Weber, professor of economics at the University of Massachusetts and lead author of the paper, has a good thread summarizing their findings here, but we recommend people check out full sheet.



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