The End of Unemployment - what constitutes a recession in the new century?

INTRODUCTION:

Earlier this year, Blackrock appeared to have woken up to the demographic issues and their effects we described here back in May.

"The shrinking supply of workers in several major economies due to aging means a low unemployment rate is no longer a sign of the cyclical health of the economy. Broad worker shortages could create incentives for companies to hold onto workers, even if sales decline, for fear of not being able to hire them back. This poses the unusual possibility of 'full employment recessions' in the U.S. and Europe."

It may be surprising at face value that the effects of demography-induced tightness in the labor market is only now starting to be noticed by large asset management firms.

After all, demography is a slow-moving macroeconomic giant that is fairly easy to track in real time especially in jurisdictions that have the necessary robust bureaucracy to be able to accurately garner simple facts about their population.

Secular demographic decline is, on a relative basis, a completely new phenomenon to recorded history.

Previous civilizations did undergo a number of brief epochs where fertility decline, or more precisely fertility decline relative to non-natural increased mortality, damaged demographic health and in some cases outright ended the existence of the civilization that existed at the time.

However, no prior major civilization managed to conquer mortality as the post WWII epoch we live in presently.

Higher degrees of child mortality especially meant that a brief TFR (total fertility rate) decline from 6.0 children per woman to 4.0 children per woman could be fatal for a civilization.

Today, larger families that would be considered normal a few centuries ago in nearly all cultures make headlines in foreign-language papers.

Demographic decline in the manner that it manifests today in the developed (and increasingly developing) world is historically unique. With child mortality minimized, most conditions treatable, and longevity becoming an ingrained norm, the actual TFR needed to sustain a population long term is 2.1 children per woman.

Given that the pace of advances in medicine has been so rapid, technology has enabled jurisdictions around the world to see their populations continue to grow and economies run without demographic headwinds even as TFR declines well below replacement for decades.

This creates a phenomenon where the demographic momentum of previous generations' higher birth rates, coupled with an expansion in life expectancy and thus also retirement age creates a multi-decade lag effect on demographic decline (the length of which can vary depending on how low fertility goes).

Unlike the Greeks, Romans, or Maya, modernity has been able to create conditions where entire generations can essentially forgo childbearing while simultaneously exerting a period of positive pressure on the national economy, a phenomenon known as the demographic dividend.

The issue with this, as pointed out in our previous post on this topic, is that eventually the larger population cohorts have to retire and demographic momentum runs out of steam. Younger generations are unable to replace their older counterparts in number, competence, and experience. This phenomenon creates the massive secular tightening trends in the labor market that we see today.

In turn, this manifests itself in the end of unemployment, and with it, the need to re-evaluate and re-frame what this means for monetary policy in a myriad of economic conditions.

What is a recession if we have no unemployment?

How does this influence the mandate of central banking institutions?

How might it change their mandate?

Are the current metrics of checking on the health of the economy obsolete?

What does it mean for central banks when degrowth isn't the end of the world?

A new framework must be devised.

🔽 Continued

https://kanakrant.substack.com/p/the-end-of-unemployment