Although the US economy continues to recover, it is certainly taking a lot longer than expected and labour hiring is still slow, leaving the unemployment rate to decrease but mostly due to a lower labour force. Other economies are in a similar situation but their recovery has not been quite as dramatic. About 8.3% of workers in advanced economies are out of work and the employment rate continues to recede slowly.
In Europe unemployment is expected to reach a peak later this year before it starts to improve. It is clear that low growth and the issues with the public and banking sectors debt have been mostly to blame for the low growth of employment. Job creation rates have taken on a new dimension in that hiring uncertainty is on the rise. There is a weak outlook for growth and there is uncertainty about investment opportunities. Job seekers do not have the right profiles for companies that are looking to hire personnel, so they are reluctant to hire people.
It can be difficult to measure the extent that companies are prevented from expanding their workforce because of labour hiring uncertainty. The ILO has now developed an indicator which is designed to capture what is the uncertainty of the labour market as seen by potential employers making hiring decisions. This indicator is a way to measure hiring intentions and can be calculated by taking the difference between the percentage of employers that expect to hire more employees and the percentage of employers that expect to downsize their work force. Hiring uncertainty and the added lack of clarity that firms have surrounding their economic situation can drive up unemployment.
Firms are concerned about new growth but also have uncertainty regarding new areas of growth. They are wary of the political environment which could have an effect on their investments, affecting profitability. The uncertainty of the labour market and the political environment each play a role in the uptick of unemployment rates within G7 countries. Changes in uncertainty also occur prior to changes in unemployment rates which can be an indication of the availability of more information regarding indicators that improve the forecasting of labour markets.
There is a high correlation between labour hiring uncertainty and policy uncertainty. Public debt is a significant factor which explains the evolution of a business’ hiring uncertainty. In countries where levels of public debt are high the labour hiring uncertainty of companies is about one percent higher than low periods. Standard economic factors are also accounted for in hiring uncertainty. Higher labour costs are directly related to higher levels of uncertainty for obvious reasons.
Changes in competitiveness have an impact on hiring uncertainty, so that when the uncertainty is even stronger the percentage for hiring uncertainty is two percentage points higher. Southern European countries have had results which suggest that reduced public debt and a political agenda of reform which provides stronger competitiveness that leads to increased hiring. This positive contribution towards the creation of jobs can compensate for the effects of deflation created by austerity policies and reforms.