[Why&Next] Han-US, Why Is Employment Good Despite Poor Economy?

"Over the past few years, the labor market has shown remarkable resilience, with job creation, wage increases, and the resulting rise in spending and employment driving economic growth."

Jerome Powell, Chair of the U.S. Federal Reserve (Fed), after ten rapid interest rate hikes since last year, decided to hold rates steady at the June Federal Open Market Committee (FOMC) meeting. However, he still focused on the hot labor market, indicating that the war against inflation is not over. The U.S. Consumer Price Index (CPI) for May rose 4.0% year-over-year, marking the smallest increase in 2 years and 2 months since March 2021. Yet, it still exceeds the target of 2.0%, and the core CPI, which excludes energy and food, remains high.

Focus on Tight Labor Market... Too Early for Monetary Policy Shift

The Fed especially paid attention to the labor market. According to the U.S. May employment report, nonfarm payrolls increased by 339,000 from the previous month, significantly surpassing Bloomberg’s forecast of 195,000. The labor force participation rate remained steady at 62.6%, and the unemployment rate stayed low at 3.7%, indicating a still robust labor market. Oh Sam-il, Deputy Director of the Employment Analysis Team at the Bank of Korea’s Research Department, explained, "Despite steep interest rate hikes in the U.S., the labor market has remained strong in recent months, and the unemployment rate remains low. It is estimated that a shift in monetary policy would be possible only after reaching the natural unemployment rate level of 4.5%, but since the labor market is still tight, it is considered premature to cut interest rates."

In South Korea, despite concerns over the economy due to sluggish exports, the labor situation remains solid. According to May employment trends, the number of employed persons last month was 28,835,000, an increase of 351,000 compared to the same month last year. The increase in employment expanded from 312,000 in February to 469,000 in March, then stabilized around 350,000 in April and May, exceeding expectations. Notably, the employment rate for those aged 15 to 64, based on OECD standards, approached 70%, marking the highest level since statistics began in 1989. Kim Ji-yeon, a research fellow at the Korea Development Institute (KDI), analyzed, "Before COVID-19, the annual increase in employment rate was about 0.1 to 0.2 percentage points, but in 2021 and 2022, it rose by as much as 1 percentage point. The labor situation after COVID-19 shows an unusually high employment growth historically."

Although both South Korea and the U.S. have solid labor markets, the situations differ in detail. Research fellow Kim said, "The U.S. economy is based more on domestic demand than exports, so employment is a key indicator directly linked to economic conditions. However, South Korea’s economy is export-oriented, so it is somewhat different. Employment has a low correlation with exports but is closely related to domestic demand, especially consumption. Despite the global economic downturn affecting exports negatively, domestic demand, centered on service consumption, remains high, helping South Korea’s employment remain favorable."

A key difference between the U.S. and South Korea in the labor market lies in labor supply. In the U.S., many middle-aged and older workers retired early during COVID-19, reducing labor supply. Subsequently, as service consumption recovered, labor demand rose while supply remained limited, creating a very tight labor market. In contrast, South Korea did not experience early retirements during COVID-19; rather, labor force participation among older adults increased. Regarding the employment outlook for the second half of the year, Research fellow Kim predicted, "While the semiconductor industry may rebound, there is nearly a one-year lag between the peak of manufacturing activity and manufacturing employment. Therefore, the increase in employment in the second half is expected to be smaller than in the first half. With manufacturing and construction sectors underperforming and employment in the social service sector showing a pattern of high in the first half and low in the second half, the growth in employment will likely slow down in the latter half."

Strong Employment Supports Upward Pressure on Core Inflation... Employment Shows 'High in First Half, Low in Second Half' Pattern

Additionally, after the pandemic, the U.S. has shifted toward reducing working hours instead of layoffs, while South Korea has seen an increase in female employment, reflecting country-specific differences. According to the May employment statistics released by Statistics Korea, total employment increased by 351,000 compared to a year earlier, with female employment accounting for 348,000 of that increase?99.1% of the total. Among female workers, the increase in employment among older adults is particularly high. Of the total increase in female employment, 224,000 (64.3%) were aged 60 or older. As a result, although employment increased, it cannot be said that the number of quality jobs rose. Moreover, while employment increased, total labor input decreased. The average weekly working hours last month were 39.6 hours, down 0.2 hours from the same month last year, indicating more workers splitting their working hours. The increase in workers raises wage pressure, which could eventually contribute to inflation. Professor Kang Sung-jin of Korea University’s Department of Economics said, "The recent increase in employment is due to the end of COVID-19 and the expansion of consumption markets related to travel, not a structural increase in quality jobs from productivity improvements. Ultimately, the key is export recovery through government stimulus based on price stability."

Regarding the possibility that recent strong employment indicators could drive prices higher, Kim Woong, Deputy Governor of the Bank of Korea, stated, "The labor market continues to grow, especially in the service sector, with increased labor supply mainly among women and older adults, showing better-than-expected levels. From an economic perspective, this can lead to increased income and consumption, exerting upward pressure on core inflation." Kim Jung-sik, Emeritus Professor of Economics at Yonsei University, pointed out, "Although the wage-driven inflation transmission is less pronounced in South Korea than in the U.S., looking at the labor market alone, one might argue that the effects of monetary policy are still limited."

This content was produced with the assistance of AI translation services.