It is possible that we are facing very significant and profound changes in the structure and functioning of labor markets. In Mexico and the USA, for example, there is a dynamic in the labor market that has surprised many economic analysts. This lack of understanding of what is happening in the labor market can lead to serious errors in interpretation about the current situation of these economies, which is why it is very important to try to better understand what is happening.
Currently, unemployment rates in both Mexico and the United States are at extremely low levels, which appears to be at odds with what one would expect in economies where interest rates have risen significantly over the last year. In the case of Mexico, the nationwide unemployment rate was only 2.7% in August 2023. It should be noted that this is the lowest value observed since this variable was recorded (i.e. at least since 2005). In the case of the United States, the unemployment rate fluctuated between 3.4 and 3.8% throughout 2023. These low unemployment numbers are not significantly different from those observed in the months immediately before the pandemic, but were previously only seen in the American economy in the late 1960s and early 1950s.
The combination of very low unemployment, high interest rates and a disinflationary process such as we have seen in recent months has puzzled many analysts who do not fully understand how this could have happened. However, this could be explained if the natural unemployment rate were to fall. This somewhat vague concept is the structural level of unemployment that an economy tends to achieve over the long term. The concept of natural rate recognizes that there are structural factors in an economy that inevitably lead to a certain level of unemployment. This “natural” level of unemployment is assumed to be relatively stable, and changes in this variable are generally assumed to occur only gradually.
There have been periods in the past when the natural unemployment rate appears to have increased. This was the case, for example, with the computer technology revolution, which created a huge imbalance between the skills available to workers and the skills required by employers. For example, the unemployment rate in the United States remained above 5% for most of the 1980s and 1990s, while unemployment rates in several European countries reached record double-digit levels. This situation was gradually corrected as workers acquired the necessary skills to enter or stay in the new world of work: secretaries learned to use word processors, accountants used computer applications for their work, etc. This work phenomenon appeared relatively suddenly at the time, caused huge disruptions in labor markets and was slowly adjusted over several years.
However, it now appears that we are in a completely different situation. Now everything seems to indicate that the natural unemployment rate is falling. This seems to indicate that there is a better match between the skills or characteristics in demand in the labor market and those possessed by potential workers. What could that be about? I venture two hypotheses: On the one hand, the emergence of platforms like Uber, Didi, Lyft, Rappi or Cornershop; on the other hand, the emergence of the so-called home office. I believe that these two factors could be responsible for the decline in the natural unemployment rate in various economies.
Why do I believe this? Perhaps this should be the subject of another article, but first let’s mention that the flexibility these new jobs offer seems to align with the needs of many potential workers, who see them as an alternative to traditional office jobs with stricter schedules and regulations. This flexibility in certain types of jobs has enabled the integration into the labor market (even if it is precarious) of many people who previously had difficulty doing so. In some other cases, these types of jobs offer a quick and acceptable alternative for re-entering the labor market in the event of unemployment or no source of income, as was the case during the pandemic.
In any case, I think that in our analyzes of the macroeconomic situation we should start to consider a possible reduction in the natural unemployment rate. If this were the case, the observed decline in the unemployment rate or the high number of existing job openings would not necessarily mean that an economy is overheating, as some analysts claim in the cases of Mexico and the United States. This would of course also impact our estimates of the unemployment gap and therefore output, which in turn would impact monetary policy recommendations. Therefore, it is important to better understand everything that happens in the workplace.
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