A worker guides the engine and drive train as they are installed during the assembly of a mini van.

Recession is coming to many developed countries and one– the US – is already in a technical recession if you use the definition of consecutive falls in quarterly GDP. But this will be a recession without unemployment which makes it very different to most and potentially much more concerning when it comes to the persistence of high inflation.

No two recessions are the same. The last Covid recession saw the US unemployment rate rise by more than ten percentage points in one month to nearly 15% but, this time around, the unemployment rate might not rise by much more than half a percentage point to a little over 4%. Quite clearly the Covid recession had once-in-a-generation characteristics that made the unemployment rate surge, but even if we compare the current situation to prior non-Covid recessions it looks as if things will be very different.

What’s more, we are not just talking about the US here because tight labour markets appear to be almost everywhere in the developed world and hence looming recessions are not going to lift unemployment rates materially. For a start, there is plenty of evidence that high vacancy rates and a relatively small pool of unemployed workers are making firms hoard labour.

If we look at the US again, we can see that layoffs have not increased materially even though GDP fell the whole way through the first half of the year. In the UK, the Bank of England is warning that the UK will start a five quarter recession from Q4 and yet there’s no sign yet that actual redundancies are increasing or that firms plan large layoffs.

For instance, a survey from law firm GQ Littler suggests that planned redundancies in Q2 were 21% lower than Q1. Of course, it could be argued that the recession is not here yet and firms will only start to shed labour once growth goes into reverse. But Mr. Steve Barrow, Head of Standard Bank G10 Strategy doesn’t think this is the real reason. Instead, it looks as if firms in the UK, and elsewhere will engage in labour hoarding as they stay sensitive to the tightness of the labour market and the potential difficulty and costs of re-recruiting workers in the future when the economy emerges from recession.

This is not to deny that there will be increased layoffs; just nothing like the scale we might have seen in the past when economies were being pulled through the wringer. The BoE argued in its recent monetary report that the unemployment rate could rise to just over 6% in coming years from 3.8% now. But Mr. Steve Barrow  thinks that’s too high and, even if it is correct, it would still be far below the 8.5% peak we saw in the global financial crisis recession of 2008/09 which also lasted for five quarters.

If tight labour markets and labour hoarding by firms make this a recession devoid of any significant rise in unemployment it is bound to have a number of important consequences. Some might see it as a positive factor because an absence of layoffs will help avoid a steep drop in GDP given that employed workers produce something while unemployed workers do not.

However, GDP is not just a function of the numbers employed but also how long they work and their productivity. If labour is hoarded, it is likely to bring down the average workweek and mean weaker productivity growth. Another potential benefit of tight labour markets, especially in Europe right now, is that it could lower the chances of social unrest over the winter as the dramatic rise in energy prices really starts to bite. That might sound alarmist but you only have to look at the comments by German Chancellor Olaf Scholz in the previous week, who said that he does not anticipate unrest in Germany over soaring gas prices to know that politicians are wary.

But whatever good news might be contained in the prospect of very modest increases in unemployment, there is potentially a lot of bad news for central banks and investors if firms pay up to hoard labour and/or workers use this power to demand excessive wage awards. For this will help maintain elevated inflation even as some of those factors that have lifted prices up to now, like energy prices and supply chain tensions, start to ease.