ONGOING labour market strength could make the road to rate cuts from the Bank of Jamaica (BOJ) a longer one, according to economist Dr Damien King.

King last Wednesday on X (formerly Twitter), referencing Jamaica’s historically low 4.2 per cent unemployment rate, wrote, “This will now make it challenging for the Bank of Jamaica to keep inflation low since a labour shortage drives up wages and inflation.”

In that posting, King drew a straight line from the tight labour market to its likely impact on inflation. In an interview with theJamaica Observer, he added, “with upward pressure coming from the labour market, [the BOJ] really doesn’t have much room to lower interest rates”.

The BOJ implemented a stat dose of rate increases to help cure an inflation sickness that emerged as a co-pandemic with COVID-19. The rapid rate increase — the policy rate went from 0.5 per cent to 7 per cent in the space of one year — left economists fretting that even more pain could be realised if it caused spending and hiring to cool too much.

But the opposite has happened, especially on the hiring side.

Data from Statin show that since the BOJ started increasing its policy rate in October 2021 up to now, approximately 85,000 more people have found a job, swelling the ranks of Jamaicans who are currently working to 1.32 million, the highest ever in the country’s history. During that same period, just under 50,000 more people joined the labour force, yet those who couldn’t find a job dropped from 94,300 to 57,300.

And as King said, companies experiencing a labour shortage will have to pay more to attract talent and that could cause headaches for the BOJ in dealing with inflation.

“I am not making a prediction, because what the Bank of Jamaica ultimately decides to do is going to depend on its quantitative analysis and that will determine how much room it thinks it has [to change rates] and what other price pressures are coming in from other factors like commodity prices, and so on. So I don’t have the quantitative basis to make a prediction about where the interest rates are going to go. I am just saying that’s the difficulty the Bank of Jamaica is going to find itself in: That it might shortly have to dampen the incipient growth momentum we are seeing in the economy, by keeping interest rates high or maybe nudging them up some more or not lowering them by as much as they otherwise would have liked to do,” King told the
Caribbean Business Report.

The BOJ has been set a target of maintaining inflation in a band of 4 per cent to 6 per cent. The latest inflation data from Statin show inflation was running at 6.9 per cent in December. The inflation figure for January is scheduled to be released next Thursday, just days before the rate setting monetary policy committee of the BOJ is scheduled to meet before releasing its policy decision on February 20.

King went on to outline more how the labour market impacts inflation and therefore the policy decisions the BOJ, like any other central bank, has to make regarding interest rates.

“Unless you understand how the labour market works, you would think that a 4.2 per cent unemployment rate means that 54,300 people are ready and waiting to work and have not been hired. That is misleading because the labour market does not work like that. It is not a hard and sharp line. It is not [as if there is] a queue and people are just standing there and waiting to walk into your workplace,” he elaborated.

“Generally, when the unemployment rate in a country gets down to as low as 4 per cent, economists actually classify that as [a state of] full employment, because you are always going to have some number of persons, some part of your labour force, that is between jobs. They leave their existing work for some perfectly good economic reason.

“Maybe the particular business they work for pursued the wrong strategy or was inefficiently run, and it lost market share to another business in the same industry, and that same employee has a good chance of being re-employed by another firm in the same industry that is expanding or maybe that industry is contracting and another industry is expanding.”

“For any of those reasons, the person is not going to lose one job today and start the next one tomorrow, so he is going to be what is called frictionally unemployed, at least for a few weeks. And when you scale that to the whole economy, what it tells you is that you are always going to have some small percentage of your labour force that is between jobs. That makes up a lot of your 4.2 per cent, so it won’t ever go to zero.”

King confirmed that his assertion means “the effective unemployment rate is lower”. It is not clear from Statin data if the figure includes underemployed, marginally attached or discouraged workers.

But King was clear: “I am saying 4 per cent is as tight as it can get and this aligns with anecdotal evidence, because any businessperson you ask, and I have personally asked every single one that I have run into over the last year, and they have told me, including the businesses that I am associated with, the consistent description is that we are trying to hire and we cannot find people at every level.”

He pointed to a growthless jobs report from the Caribbean Policy Research Institute (Capri), a think tank that “identified that the vast majority of the jobs increase over the last five years as being full-time, formal sector jobs, not hustling. So, what we have is a situation where we are at effectively full employment, the labour market is as tight as it can be, so don’t make the 4 per cent make you think that there is any room to go. And what that means is that businesses are now hiring mostly from each other. And people don’t leave one job to go to another one to do the same thing without more money. So this tightness is causing upwards pressure on wages — it must — which is going to translate into higher prices. So, therefore, it is going to threaten the Bank of Jamaica’s inflation target.”