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A full employment recession?

Published at: 15-01-2023

Posted on: January 15th, 2023 by RaduC No Comments

We are probably facing one of the most anticipated recessions. There seems to be a general consensus that 2023 will be the year we see a negative GDP growth for at least two consecutive quarters in a sizable part of the world economy. The IMF estimates that half of Europe’s economy and a third of the world economy will go into recession this year, while China’s economy will slow down for the first time, below the average global growth.

Historically, recessions come with a shrinking economic activity, reflected in declines in turnover and profitability. Curbing the latter implied cost adjustments, including wage cuts, through employee redundancies. Inevitably, the consequence has been rising unemployment, while a falling purchasing power has contributed to a vicious recessionary circle.

Will it be the same this time? Not necessarily, because we may witness an entirely new development in the economic context: a full employment recession. Even if the steady rise in interest rates by central banks will slow economic growth to a halt, employers can be expected to put firing people last in the panoply of cost-cutting measures they see as necessary.

The explanation for such perhaps unprecedented behavior lies in the fact that in many developed economies, the demand for labor exceeds the supply, ultimately leading to labor shortages. Such a situation stems from major structural changes in economies that make the occupational profile of job seekers increasingly unsuitable. As a result, demand is hardly meeting the supply for not (only) quantitative, but also qualitative reasons. This is all the more amplified in countries that supply skilled migrants, such as Romania.

In this context, companies think twice before deciding to lay off some of their employees. The post-pandemic blockades of the world’s major airports will have remained fresh in the minds of employers and managers. Rushed to lay off a large number of employees as the number of flights plummeted during the pandemic, once normality returned quickly, they faced major problems in rehiring people, who preferred companies that offered more secure employment.

The question many decision-makers will now ask themselves, in the context of a very tight labor market, is: when the economy recovers, how easy will it be for me to re-hire professionals with the skills of those I laid off? For this reason, it is likely that a potential recession, as long as it is not deep, will have a minimal impact on unemployment. After all, the fact that the labor market is facing a shortage suggests that an adjustment in the business volume could bring the labor market into a balance rather than a supply surplus.

Paradoxically, such an equilibrium scenario is also desirable from the perspective of falling inflation. Because a labor shortage implies high staff turnover and a permanent migration towards higher and higher wages offered by competing employers. Such wage dynamics will only fuel the price spiral. The desirable scenario could be one where such migration stops and people stay in the jobs they already hold, admittedly with less spectacular wage increases. This would reduce inflationary pressures.

A full employment recession would be the least evil we could face in 2023.

Have a nice weekend!

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