Supply bottlenecks have grabbed all the headlines recently, but longer-term structural changes brought about by the pandemic (labour markets, especially) are important to understand where we are headed
But first, a recap of where we stand on #bottlenecks
The sharp swings in some commodity prices (lumber, iron ore, coal) are suggestive of #bullwhip effects
For their part, shipping costs look to have peaked
Semiconductor billings (left panel) point to demand that has outpaced supply that is growing, but not growing fast enough;
#bullwhip effects show up in rising motor vehicle inventories at the factory, even as retail inventories have fallen
Durable goods have driven the surge in #inflation (middle panel), especially in the United States
But there is a great deal of diversity across regions; Asia has not seen the same surge in inflation
We should not disregard inconvenient price changes, but it's worth pointing out how unusual the surge in durable goods prices is; it bucks the trend of falling relative price of durables over the last few decades
How quickly will #bullwhip effects go into reverse once backlogs begin to ease? Depending on the answer, we may find that bottlenecks are resolved faster than currently feared, just as they have lasted longer than initially expected
But there is something of a race against time; if the current inflation surge feeds a wage-price spiral and rising inflation expectations, the task will be much harder
Hence my focus on labour markets in today's presentation at the G20
The trajectory of total hours worked is similar across regions; hours fell by 10-20% with the pandemic shock and have bounced back since
But these similar trajectories have come about in strikingly different ways
This chart holds the key to some puzzling developments
There are three ways that hours worked could fall: (1) increase in unemployment, (2) drop in average hours worked per employee, and (3) a decline in labour force participation
The respective roles of these three factors differ widely across economies
In the US, unemployment and labour force participation account for the fall in hours worked;
In the euro area and other AEs, furlough schemes kept worker-firm relationships intact (yellow bars);
EMEs were hit hard by the pandemic and labour force participation dropped sharply
The differences in the way that hours worked declined have influenced the shape of the recovery;
Evidence is in the Beveridge curves across countries
The Beveridge curve plots the relationship between the unemployment rate and job vacancies
Normally, changes in economic activity would show up as shifts *along* the Beveridge curve with stronger activity showing up as lower unemployment and higher job vacancies
Check out this podcast where @tracyalloway and @TheStalwart speak to Thomas Lubik on how to read the evidence from the US
Rather than moving *along* the Beveridge curve, the US has seen a rightward shift, usually seen as a sign of a skills-jobs mismatch
But there is no such shift in euro area or Japan; and the UK Beveridge curve has started to drift out since the middle of the year
Usual interpretation of a rightward shift in the Beveridge curve is as a mismatch between jobs and skills; after the GFC there was a reallocation from the real estate sector
But this doesn't work this time round; vacancies are highest in services that saw the largest job losses
In any case, the contrast *across* countries is very striking; in the euro area and Japan, there is no sign of any deterioration of the jobs-skills match
In this sense, preserving the employment relationships appears to have steered the recovery toward the pre-pandemic state
We need to understand better these differences; firms and workers are part of the intricate web of relationships in the economy with relationship-specific capital that acts as the “glue” for the economy
The ties that bind all of us as colleagues, neighbours, workers and employers arguably go beyond the transactional nature of the weekly payslip
On the other hand, the recent upward drift in the UK Beveridge curve from the middle of 2021 suggests that any simplistic explanation will be found wanting, as the UK had also implemented furlough schemes similar to euro area economies
How these differences in labour market functioning translate into wage growth is key for #inflation, but wages are particularly hard to read at the moment due to pandemic related shifts in the composition of employment and the effect of furlough schemes bis.org/publ/bisbull47…
Wage growth across advanced economies looks to have been in line with its pre-pandemic trends, or a little below; and here, the outcomes of recent wage negotiations are filling in much needed detail...
It is notable that in the United States, where labour market changes are most apparent, wage growth has picked up recently despite labour market conditions that appear weaker than before the pandemic
Let me gather the links in one place for easier reference
Two further points to bear in mind are (1) counterparty sector (official or private financial, private non-financial) and (2) the distinction between location and nationality
For this, the following BIS data would shed more light
First, regarding the counterparty sector, the 2020:Q1 surge in cross-border banking flows stands out
Normally, we would expect a sharp retrenchment during stress episodes, but there was instead a surge, as discussed in this #BIS_Bulletin bis.org/publ/bisbull34…
A closer look reveals that most of the flows were the recycling of dollar funding through interoffice flows as part of a "Grand Overdraft"; this explains the surge and the subsequent unwinding
#DeFi, or decentralised finance, is the latest manifestation of this idea where the ledger is much more elaborate than simply keeping score of who pays whom
Bottlenecks started out as disruptions to supply, but they have morphed into something more
Key point to bear in mind: in aggregate at least, supply has caught up to pre-pandemic levels in key sectors like semi-conductors as well as in raw materials and shipping
So, what then is going on?
Two factors are key: (1) shift in composition of demand and (2) the endogenous changes in behaviour that's given rise to bullwhip effects
Decentralization is motivated by the governance benefits - the idea is that the checks and balances of the community as a whole is the best way to safeguard the integrity of the system and avoid capture by a few powerful entities
But there has been an argument that the price to be paid for this better governance is the lack of scalability
Privacy looms large when CBDCs come up, as digital currencies rely on a ledger of some kind - a record of who owns what, when, and who pays what to whom; see this (tough but fair) interview with @izakaminska and @senoj_erialc I gave to @FTAlphaville
The idea of a digital ID-based CBDC causes discomfort (to say the least); it conjures up notions of compulsory national identity cards
See this classic episode of "Yes Minister", for instance