Macroscope: Labour markets weathering the storm

Executive summary

The sharp slowdown in global growth last year caught investors by surprise and raised fears that we could be approaching the end of the cycle. However, amidst this doom and gloom, we have seen many labour markets remain remarkably resilient, as firms continue to take the plunge on hiring.

This has been most pronounced in the developed world, with employment growth continuing at a steady clip. US hiring has slowed only modestly, as growth returns to normal from the fiscally induced highs of 2018. Labour market conditions in the eurozone and Japan have been impressively solid given the sensitivity of these economies to the worsening production and trade cycles.

In emerging markets the picture is cloudier given data issues. It certainly seemed that hiring slowed last year in response to a particularly challenging environment for this region. There are tentative signs of improvement on this front, alongside one or two more positive developments in the broader economic data, although it is still early.

While labour markets are sometimes considered a lagging indicator, it is noteworthy that we have yet to see a sharp fall out from slower growth. This resilience alongside supportive policy settings, easing trade tensions and cooling financial stress should set the stage for a rebound in global growth.

With labour market conditions in many economies still seemingly remaining tight, there is increased focus on the risk posed from gradually rising labour costs to margins. We need to differentiate carefully across countries and equity indices to spot segments of the market which might be most exposed.


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Luke Bartholomew

Paul Diggle

Govinda Finn

Gerry Fowler

Jeremy Lawson

James McCann


James McCann

Chart Editors

Yashaswini Dunga

Nancy Hardie



Chapter 1


Luke Bartholomew, Economist

Labour markets weathering the storm

Global growth slowed sharply last year as a confluence of policy tightening, trade tensions and financial stress took a steep toll. Given the scope and speed of this deterioration, the debate around the possibility of a recession has been fierce. Investors have pored over short term activity data and measures of business and consumer sentiment, which have worsened in many regions. However, perhaps less attention has fallen on labour markets, which in many cases have been more resilient.

This is perhaps most true in developed markets (DM). In aggregate, hiring slowed only modestly over 2018 across the region as a whole, and actually picked up around the start of 2019. Scratching beneath the surface, this is certainly true of the US, where employment is rising at a healthy rate, particularly outside the manufacturing sector. Even in the eurozone and Japan, which tend to be highly sensitive to the global trade cycle, we have seen employment growth moderate rather than freeze up over recent quarters. Employment in the UK has been solid, but this might be a side effect of firms’ unwillingness to invest.

The emerging market (EM) picture is cloudier, as many countries (including China and India) do not produce detailed labour-market reports. An aggregate of those that do suggests a more pronounced slowdown in employment growth over 2018. This could reflect the challenging environment for this region last year, with global trade slowing, commodity prices soft, trade tensions building and spillovers from tighter US policy providing a drag. On a more positive note, there are tentative signs of a recent pick-up in employment. This would be consistent with the improvement in hiring intentions reported in survey data across a broader range of EM economies. However, given the aforementioned data issues we should take care not to over interpret this bounce.

Overall, the slowdown in headline global growth juxtaposes more resilient labour markets in many economies. The pessimistic take might be that this is a lagging indicator, and this deceleration will weigh on hiring decisions going forward. However, it is encouraging that many firms have felt confident enough to continue to hire in this environment, and suggest that weakness in the worst affected economies and sectors has not bled into the healthier sections of the global economy. Moreover, robust labour markets provide a solid underpin for consumer confidence and incomes. With policy settings more supportive in many economies, trade tensions calming and financial conditions looser, we expect the global economy to bounce back over the second half of this year, helped by still-healthy labour-market fundamentals.

Chart 1: Firms still hiring despite slower growth

Source: National Sources, Haver (as of February 2019))


Chapter 2


James McCann, Senior Global Economist

Slowing, not stalling

Non-farm payrolls remain a blockbuster event in the data calendar, and are one of the indicators that markets focus on most closely when trying to gauge the health of the economy. On this front, payrolls have delivered a bumpy ride. Following strong employment growth around the turn of the year, job creation stalled in February, exacerbating fears over a downturn. A solid rebound in March helped allay concerns, but looking through volatility, there are signs of a downshift in hiring. Payrolls are running at an average of 180,000 per month so far this year, a healthy clip, but weaker than the 220,000 rate delivered last year.

While hiring has slowed in the US, the labour market remains solid, providing more evidence that we are set for a soft landing in growth this year.

The slowdown has been most pronounced in the goods-producing sector, where the three-month growth in payrolls has slumped to an 18-month low. In particular, manufacturing has seen a clear deceleration in hiring, as it feels the headwinds from weaker global activity. This had been foreshadowed in business sentiment surveys, which continue to signal weak hiring intentions in the sector. Services payrolls meanwhile, which correspond to around 70% of US jobs, show only a modest slowdown. Survey data continues to point to encouragingly solid labour demand for these sectors, although this has also moderated from its peak.

Initial claims provide another useful lens through which to view the health of the labour market. Interestingly, we saw a bump higher in unemployment insurance claims towards the end of last year and into early 2019 (see Chart 2) as financial stress surged and the government shutdown rolled on. However, we have since seen claims resume their downward march to new 50 year lows, providing further assurances that labour market conditions in aggregate remain healthy.

Alongside the slowdown in aggregate employment growth, we have seen the unemployment rate show signs of stabilisation, following its long decline from a post-crisis peak of 10%. In part this might reflect more and more people being drawn into a healthy labour market, with participation rates having edged slightly higher. However, this might also tell us that we are seeing the economy start to slow toward a trend more like growth, which is no longer eating rapidly into spare capacity.

From a historical perspective, 3.9% unemployment is low. However, in the most recent Fed minutes, members speculated if there was still slack in the labour market. This was used as one of the potential explanations for the puzzling weakness in recent underlying inflation, alongside concerns over a decline in inflation expectations. We have seen wage measures track higher (see Chart 3), but firms have been shielded from rising costs by better productivity performance. Further gradual increases in pay growth, alongside less-favourable productivity, should help bring underlying inflation back towards target. However, the Fed is happy to sit tight and see this materialise under its new patient policy approach, especially with debate building at the central bank as to whether it should tolerate inflation overshoots in order to be more symmetric around its 2% inflation target.

Chart 2: A short lived bump in claims

Source: DOL, Haver, ASIRI (as of April 2019)

Chart 3: A slow grind higher in wage pressures

Source: Haver, ASIRI (as of Q4 2018)
While hiring has slowed in the US, the labour market remains solid, providing more evidence that we are set for a soft landing in growth this year.


Chapter 3


Luke Bartholomew, Economist

Brexit? What Brexit?

The 0.2% month-on-month rise in UK GDP in February added to the already strong 0.5% m/m gain seen in January. It is therefore now likely that GDP growth for the whole of the first quarter will come in at least around the trend rate of growth, if not slightly above. This acceleration from the sluggishness seen in the back-end of 2018 might seem surprising given the spate of relatively weak survey data and ongoing political uncertainty around Brexit. However, there is evidence that surveys tend to overstate the degree of weakness at times of elevated uncertainty. Moreover, the recent economic strength may very well have been because of Brexit, in the sense that firms were stockpiling inventory in preparation for the risk of a disruptive no deal.

The UK labour market has thus far remained robust, despite Brexit uncertainty. With limited slack and a possible a recovery in investment, this could be as good as it gets.

Given that the UK’s putative exit from the EU has been delayed until the autumn, this stockpiling is likely to be unwound in the near term, presenting a temporary headwind to growth. With the risk of a no deal exit having reduced significantly, but uncertainty around the UK’s future having been extended, growth is likely to remain around or slightly below current levels.

The UK labour market has also performed well recently, and much better than survey data would suggest. Employment rose by a very solid 179k in February with the unemployment holding steady at a 44-year low of 3.9%. Once again, this strength could actually be because of Brexit, with firms responding to growing demand by hiring workers rather than investing in new capital. This is because workers would be easier to shed in the event of a no-deal Brexit than a large-capital project. When there is some resolution to the Brexit uncertainty, it is likely that investment will pick up somewhat, which is likely to cause employment growth to slow, so we may be close to the peak of the UK labour market.

Because output growth appears to have been so strong in the first quarter, the UK might actually eke out some productivity growth in the first quarter, with the economy expanding more than the demand for labour. However, the recent weakness of investment is likely to push down further on the UK’s already very weak productivity growth over the long run. With Brexit also likely to push down on future labour force growth by reducing the number of migrants, the potential growth rate of the economy is likely to fall even further.

With lower labour-force growth and a very low unemployment rate, the labour market now appears tight enough to generate wage growth consistently well above 3%. Indeed, average hourly earnings held steady in February at 3.5%, a 10-year high (see chart 4). Combined with very weak productivity growth means that unit labour costs continue to rise and domestic inflation pressures are building (see chart 5). This means that despite the prolonged Brexit uncertainty, the Bank of England is likely to hike interest rates by 25 basis points in the second half of this year.

Chart 4: Wages growing strongly...

Source: ONS, ASIRI (as of February 2019)

Chart 5: ...But inflation pressure also mounting

Source: ONS, ASIRI (as of Q4 2018)
The UK labour market has thus far remained robust, despite Brexit uncertainty. With limited slack and a possible a recovery in investment, this could be as good as it gets.


Chapter 4


Paul Diggle, Senior Economist

Labour market resilience

European labour markets have been a bulwark of economic resilience amid a very weak external trade environment and a series of temporary shocks. Rising employment, declining unemployment, and stronger wage growth, are important reasons why we do not see the current downswing in eurozone economic activity morphing into a recession. Indeed, as external demand starts to pick up on the back of the China stimulus, and temporary drags are fading, there are signs that labour-market resilience is helping eurozone economic activity to improve.

European labour markets have been a bulwark of resilience amid a very weak external trade environment and a series of temporary shocks.

Despite the marked weakening in various measures of European activity over the past year, the labour market has held up relatively well. Eurozone employment increased by 1.3% over the past year, the unemployment rate has declined to a new cyclical low of 7.9% (see chart 6), and wage growth is tracking at 2.3% year-on-year. To be sure, unemployment rates remain unacceptably high in some eurozone member states – rates of 10.7% in Italy, 13.9% in Spain, and 19.6% in Greece are well above our estimate of the ‘natural’ rate of unemployment, and youth unemployment rates are higher still. Nevertheless, the big picture is that European labour markets have been on an improving trend almost everywhere, even through the sharp industrial and external-sector slowdown of the past year.

Admittedly, there have been signs that this resilience is starting to wane. Eurozone-wide employment growth has been slowing over the past year, and leading indicators such as consumer confidence and the employment component of the Purchasing Managers’ Index points to a further moderation (see chart 7). In the European economies that have experienced the deepest downswings – Germany and Italy – some labour-market indicators suggest that unemployment could tick higher.

This contrast – strong labour markets, but signs that the very weak external environment is starting to erode some of that resilience – sets up the key moving parts of the eurozone outlook from here. Will continued external headwinds spill over into the domestic economy, dragging the labour market down? Or, instead, will a strong labour market insulate the domestic economy, and indeed drive a rebound as external and temporary domestic drags fade?

Our baseline forecast is for the latter. The evidence that the Chinese economy in particular has bottomed out, and is now strengthening on the back of stimulus measures, is mounting. That should help drive an improvement in the external environment. At the same time, temporary drags on European growth, including the disruption caused by new car-emission testing standards, appear to be fading. In this context, we expect labour-market strength to drive a modest rebound in eurozone growth over the next few quarters.

Chart 6: Steady decline in unemployment

Source: Datastream,ASIRI (as of February 2019)

Chart 7: Employment growth strong but moderating

Source: Datastream, Aberdeen Standard Investments (as of March 2019)
European labour markets have been a bulwark of resilience amid a very weak external trade environment and a series of temporary shocks.

Japan and
developed Asia

Chapter 5


Govinda Finn, Japan and Developed Asia Economist

Future of work

Employment growth has been at the heart of Japan’s improving growth and inflation outcomes of recent years. The number of employed has jumped 6.5% since the beginning of 2013, despite the working-age population remaining stable. This reflects the government’s successful efforts to raise participation rates, particularly among elderly and females. Job growth at this pace has also eaten up slack, with the unemployment rate dropping to 2.3%, versus estimates of the natural rate at around 3%. The translation to wage growth may have proved frustrating, but there is no doubting the labour market looks tight.

On the face of it, labour markets are proving resilient to weaker economic data. However, compositional changes signal important changes afoot.

The resilience of the labour market has been tested in recent months as Japan has suffered a major manufacturing slowdown. At first glance, there are signs that the labour market momentum is waning. The job-to-applicant ratio is no longer rising while the unemployment rate is no longer falling. However, we do not think this reflects a fundamental deterioration in the demand for labour, but more the fading of the one-off effects of government efforts to raise participation rates.

If labour markets are really so healthy, why have we seen a deterioration in household spending measures in recent months? Consumer confidence has dropped to its lowest level since 2014 and retail sales growth has decelerated meaningfully since October 2018. We think the primary culprit is change in the composition of the labour market. While the pace of regular employment growth has decelerated in the second half of the year, non-regular employment has spiked. This reflects corporate entities nervousness regarding the outlook for economic activity as reflected in the Tankan survey, with the manufacturing DI falling to its latest level since March 2017. Given firm’s inability to manage their full time employee numbers over the business cycle, Japan has a history of adding non-regular employees in cyclical downturns.

The job market elsewhere in developed Asia may not be able to match Japan’s impressive credentials, but still looks healthy compared to historical comparisons. The one exception is Korea. The unemployment rate has been elevated since early 2018 as large minimum-wage hikes and restructuring efforts in the manufacturing sector have weighed on employment growth. Until recently, the main driver of employment growth has been public-sector employment as the government has ratcheted up spending. However, the latest data has suggested a somewhat different signal. While manufacturing-sector employment growth remains in the doldrums, service-sector growth has spiked (see Chart 9). This may not be greeted enthusiastically by some, given the dismal track record of productivity growth in Korea’s services sector, where is lags along way behind OECD averages. However, here too there are signs that things are changing. Productivity growth in the services sector has accelerated, admittedly from a low base, and is now running above manufacturing sector productivity. If Korea is to untangle itself from the global industrial cycle it will need a larger and more efficient services sector.

Chart 8: Let's get to work

Source: Bank of Japan, ASIRI (as of December 2018)

Chart 9: At your service

Source: Statistics Korea, Haver, (as of March 2019)
On the face of it, labour markets are proving resilient to weaker economic data. However, compositional changes signal important changes afoot.


Chapter 6


Jeremy Lawson, Chief Economist

The blind leading the blind

In most advanced economies, labour-market data is among the most anticipated of all data releases. Not only does it provide a critical input into central-bank decisions, but they also provide a cross-check against other economic variables. In emerging markets (EM), however, things are different. Central banks are less likely to reference employment and unemployment trends in their decisions. And labour market releases receive relatively little attention among investors. Why is that?

Data issues make it harder to interpret trends in EM labour markets. However, a broader swath of indicators is showing signs of green shoots.

The most important reason is poor data quality. China and India both publish a monthly unemployment rate, but not the underlying data that would render the trends interpretable. There are similarly large gaps in wage data. And for the data that does exist, there are reasons to doubt its veracity. For example, China’s urban unemployment rate has been falling over the past 12 months, despite the fact that the economy has been slowing (see Chart 10). And in India’s case, the government recently suppressed the release of official estimates, revealing a much higher unemployment rate than officials wanted to acknowledge.

Even in countries like Brazil and Russia that have more timely and comprehensive data, interpreting these estimates is difficult. After Brazil’s unemployment rate peaked above 13% in the wake of its deep 2015-16 recession, it has been on a downward trend as the economy recovered. However, the reported rate has displayed a zig-zag pattern on its way down, as a result of sharp increases and then declines in employment, raising the possibility that these patterns are an artefact of sampling problems.

Given these challenges, what can we say usefully say? One approach is to take a subset of countries for which there is reasonable data and calculate a weighted-average for employment growth. When we do this, we find that after employment growth recovered during the global cyclical upswing of 2017, it faltered during 2018 as EM growth moderated (see Chart 11). A limitation of this aggregate is that it does not include India and China because of their lack of data. We can get around this in part by drawing on the employment component of the Purchasing Managers’ Index data. That shows the same downturn during 2018, but a more recent upswing, consistent with the broader improvement in the EM Composite PMI.

Nevertheless, we would still recommend caution when interpreting this data. Most of the pickup in the output component of the composite PMI has been driven by services, with manufacturing still subdued. In contrast, most of the pickup in the employment component has been driven by manufacturing. Looking forward, the easing of Chinese financial conditions, and improving global sentiment are reinforcing our view that emerging-market growth will pick up again from the second half of the year. Although that should boost the EM labour market, it may not come through as clearly in the data. Central banks and investors should therefore rely more on the real activity data to gauge the underlying health of EM economies.

Chart 10: Growth and unemployment disconnect

Source: China National Bureau of Statistics ( as of Q4 2018)

Chart 11: Weak signals from EM labour market data

Source: National sources, Haver (as of February 2019)
Data issues make it harder to interpret trends in EM labour markets. However, a broader swath of indicators is showing signs of green shoots.


Chapter 7


Gerry Fowler, Investment Director, Global Strategy

Corporate margins – pressures building?

Unemployment has fallen across a range of economies over recent years. This has helped push wage growth higher, although the pass-through of these costs to consumer prices has been more muted. Against this backdrop, we have seen investors focus more and more on rising labour costs as a potential risk to corporate profit growth. There are some significant complications to consider as we seek to quantify these risks in our equity index investments.

Gradually rising wages will pose a challenge to those equity markets with high labour intensity and thin margins.

Firstly, economic data on labour markets is typically collated at the national level, but equity indices have become significantly international. More than 40% of revenues of S&P 500 companies come from markets outside the US, and with this, a significant proportion of costs too. Other regional indices around the world have become global to an even greater extent. Secondly, the largest companies in each region are often in quite different sectors, with significant variation in cost structures. For example, the US has produced the world’s most successful technology companies, with low labour intensity and higher profit margins. In contrast, some of the world’s major auto and industrial companies dominate European indices with higher labour intensity and narrower margins.

Chart 12 shows a measure of the labour intensity of profits for a selection of regional equity indices. What we can see is that the net profit per employee for S&P 500 companies is roughly double that of other regions. However, even within the US, the Russell 2000 index of smaller companies shows a particularly low level of net profit per employee compared to the larger companies in the S&P 500. This suggests that wage inflation in the US should have more impact on the profits of smaller companies than larger ones, if growth rates are equal. Additionally, wage pressure outside the US (and for non-US companies) may be more consequential for profit growth in those indices.

Rising wages are less of a problem when growth and productivity are strong, like we have seen in the US over the last couple of years. However, margins are pro-cyclical because wages tend to be stickier than revenues. Therefore, the current environment in the US of slowing growth with a tight labour market could be more problematic for profits. We are watching carefully for signs of margin pressure. The NFIB survey of small businesses gives us some forward-looking information on firms’ expectations for prices and compensation. In the latest survey, there were still more companies expecting to raise prices versus those expecting to increase compensation - but the difference is modest and has been for several years.

Chart 12: Tightening labour markets will matter more in regions where employees are less profitable

Source: Bloomberg, ASIRI (as of April 2019)

Chart 13: Rising wage pressures have recently been offset by lower commodity cost pressures

Source: Bloomberg, ASIRI ( as of March 2019)
Gradually rising wages will pose a challenge to those equity markets with high labour intensity and thin margins.