Payrolldata,PhilipsCurveandAutarkicEconomy

NFP data which came out on Friday was slightly below the expectations. The US economy added 559K new jobs against the expectations of 650k. The report which is issued by Bureau of Labour Statistics provides the sectoral distribution in job creation. The prominent increase has been in the leisure and hospitality sector as it adds 292k new jobs. Within hospitality also food services and drinking places jobs take the cake with a 186k increase. On the decline side there was a drop in the jobs pertaining to the construction sector within which the non-residential speciality trade contractors found themselves out of favour. Unemployment rate declined by 0.3 percentage to 5.8% and hourly wages showed slight improvement. Total non-farm payroll employment is down by 7.6 million from its pre pandemic level in February 2020.

This data came out 8:30 am ET in the US hence by now markets have completely assimilated the message. The US yields are down trading around 1.58 and Dollar Index is trading above 90. Dow Jones closed in green and EM currencies are in a good mood today. Even if the NFP news is stale by now, we would try to cover some academic context related to it today.

The employment number remains a major pivot in any central bank’s policy making. Many economic theories which have impacted the policy choices by central banks are based on unemployment levels. One such theory is called the Philips curve which states that in any economy as the rate of unemployment decreases, the wage inflation (and consequently the generalised inflation) will increase. Now this statement appeals intuitively both ways, higher employment rates should support wage growth and inflation and on the other hand higher inflation should attract more people to join the labour force, decreasing unemployment.

But is Philips Curve testable empirically? Do countries and economies see this phenomenon on ground over a long period. This matter has been under debate since Philips put out the curve 60 years back. Let us see why the intuition tricks us here. It is because that the nature of employment has changed overtime as the world became more globalised. Now with the digitalisation tsunami brought on by covid, relationship between the employer and the employee has fundamentally and irreversibly changed in some industries. The outsourcing model may not only survive but continue to thrive too. So, one observation here, economic theories are neither time nor space agnostic. Philips curve might work well in an idealised autarkic economy but not in the real hyper connected world. Why autarkic? we could have written closed too. Autarkic sounds much deeper and more intellectual. That’s the reason.

But before the readers take the argument to the extreme end, another curveball is in order.  The jobs issue remains of paramount importance for the democratically elected governments. Even if the general prosperity levels rise in the economy through asset price increases the issue of jobs is the biggest bogey during the election times. Hence any forecaster would do well to account for regulatory pushbacks from time to time. In the end, our thoughts are with policy makers who need to devise a middle path finely balancing the local job lobby and the global efficiency. Readers should ponder on how the twin divergent objectives can meet and what will be the cost involved? Also, who will bear that cost. Readers would do well to read Thomas Friedman’s slightly dated book The world is Flat for a more expansive insight into the issue of globalization and its collateral impacts.

Domestically the Fx reserve data released as part of the WSS report showed that reserves have reached 598 bn USD all time high mark in the previous week. The reserve accumulation topic requires a complete book on its own to appreciate fully. We will try to cover it in some detail during the week.