The unemployment rate has long been considered a powerful indicator for forecasting inflation. When corporate activity is robust, hiring increases, the unemployment rate drops, and labor shortages drive up wages. This, in turn, fuels price growth. Conversely, when production stagnates, unemployment rises, labor surpluses push wages down, and inflation cools. This inverse relationship—where the CPI growth rate rises as unemployment falls—is famously illustrated by the Phillips Curve.
Historical Context and Current Figures
As of this writing, the most recent unemployment rate (November 2023) stands at 2.5%. This is a 0.6 percentage point decrease from the pandemic peak of 3.1% in October 2020. This is not only an exceptionally strong performance compared to other developed nations, but it is also a level of low unemployment unseen since the Japanese asset price bubble era.
However, we must look at the pre-pandemic context. In 2018 and 2019, the average unemployment rate was 2.4%, with brief dips as low as 2.2% in May 2018 and December 2019. Even when unemployment hit those historic lows, wages barely budged. Therefore, the mere fact that the rate has fallen to 2.5% recently does not guarantee a strong rise in wages (though I won’t rule out wage increases driven by other factors). As always, please keep in mind that statistical data is often subject to retrospective revision.
Why the Metric is Currently Unreliable
Despite a low unemployment rate, wages aren’t rising, and as a result, the pressure of “wage-push inflation” remains weak. Thus, while the unemployment rate should be a vital metric for measuring inflation concerns (and by extension, fiscal discipline), it isn’t providing much useful insight in the current climate. Consequently, adopting contractionary policies (tightening the economy) simply because the unemployment rate is low is entirely out of the question.
The Paradox of Labor Shortages without Wage Growth
Regarding the stagnation of wages amid labor shortages, Professor Yuji Genda of the University of Tokyo edited a book titled Why Are Wages Not Rising Despite Labor Shortages? While I haven’t read the full text myself, Tsutomu Sunaga (2018) provides an excellent summary of its key points for those interested. The book cites several factors, all of which I find quite persuasive.
In my view, the situation is this: just as the labor market finally tightens and the Bank of Japan puts in maximum effort to spur wage growth (perhaps even overdoing it a bit), the government keeps making the wrong moves, neutralizing those efforts. I hope to dive deeper into this specific issue on another occasion.
References: Tsutomu Sunaga, “A Must-Read: Why Are Wages Not Rising Despite Labor Shortages? edited by Yuji Genda” (Sangyo Noritsu, May/June 2018 issue). https://www.pref.osaka.lg.jp/documents/12079/book_20185-6_1.pdf
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