Across the Atlantic, the odds of a 'soft landing' are getting slimmer

In the latest UK labor market data we saw that both unemployment and layoffs have slightly increased, while vacancies have been steadily falling over the last 13 months. At the same time, the labor force has started to grow again recently after a dismal post-pandemic performance. That would suggest that —after 14 consecutive interest hikes— the Bank of England may be succeeding in rebalancing the labor market by cooling labor demand (albeit without having much of an impact on pay so far), a task which should become easier as long as labor supply keeps expanding.

Whether this cooling down will be mild enough to prevent unemployment from raising substantially, however, remains an open question. In other words, whether a "soft landing" (to borrow a concept popular in the US) can be achieved in the UK —with the Bank managing to cool down labor demand and eventually bring down upward wage pressures without significantly swelling unemployment— is uncertain. What we can say is that the likelihood of this prospect in the UK looked worse than in the US to start with and —I argue— it has been deteriorating.

Looking at the Beveridge Curve for some answers

Before the pandemic the curve used to be downward sloping and relatively flat

The curve illustrates the inverse correlation between the vacancy rate and the unemployment rate. Its downward slope indicates that as labor demand diminishes, signified by fewer job openings, unemployment rises. The idea is that this historical correlation between unemployment and job vacancy rates offers a guide for potential future outcomes. A flatter curve slope indicates that a greater increase in the unemployment rate is associated with a given vacancy rate decline. Historically the UK standard Beveridge curve has been relatively flat (see the yellow, green, and light blue dots for the years 2001-2019 in the chart below), which implied that a considerable reduction in the vacancy rate was usually associated with a substantial surge in the unemployment rate, and viceversa.

The slope of curve steepened since 2020

Since 2020, however, this association has broken down and the curve's slope became much steeper. Job retention schemes that prevented unemployment from raising during widespread lockdowns explain only the first part of the story. Even as vacancies started to come down from their peaks in 2022, the unemployment rate failed to increase as much as the pre-covid curve would have predicted (joblessness even decreased between January and September 2022, making the curve's slope positive for a brief time). Such dynamics gave some initial hope to those talking about a possible "soft landing" for the UK labor market.

A slow return to the pre-pandemic slope?

In the first six months of this year such benign dynamics have started to come under stress. As the vacancy rate slowly but steadily continues to head towards pre-pandemic levels, we are starting to see the Beveridge Curve flattening again (see March and June 2023 data points). This means that going forward we may expect proportionally bigger jumps in unemployment as vacancies continue on their downward trend. While it's probably to early to tell whether the flattening will continue unabated, it is worth calling it out. Such developments certainly make the odds of a "soft landing" look slimmer today.

Job-hopping and competition for a shrinking pool of open jobs

While employed workers switching jobs have always been the most important component of new hires, this group has become even more important in the post-pandemic recovery. In Q2 2023, UK workers were still quitting at a rate around 1/5 higher than pre-covid average. This is because job-hopping remains high by historical standards, and open positions are often filled by job switchers. In Q2 2023, job switchers made up 48.3% of UK new hires, up from 45.1% in Q2 2019. This means that unemployed people have been competing not only with their unemployed peers for vacancies, but also with employed workers who would like to change their jobs. As FED economists recently suggested, "it would be remiss then not to account for employer-to-employer transitions when constructing the Beveridge curve". And that's what I did in Figure 2. However, doing that does not really change our story. If anything, it makes the flattening of the curve in 2023 even starker.

Conclusions

Whether or not you were a "soft landing" believer in the first place, the latest batches of UK labor market data are casting even more doubts on this prospect. If we also consider that upward pressure on UK wages is stronger than in most other advanced economies, the picture looks even worse. While the UK labor market remains relatively robust by historical standards, recent trends suggest a cooling down. It remains to be seen whether this is a transient phase or the start of a trend leading to a substantial rise in unemployment levels in the forthcoming quarters.