Robots assembling vehicle frames. Photo: AFP /  Sébastien Bozon
Robots assembling vehicle frames. Photo: AFP / Sébastien Bozon

By far the strangest and most interesting news of the day was the unexpected fall in Unit Labor Costs (-0.2% against an expected +0.2%). Since early 2014, ULC has been positively correlated with broad unemployment (U6, or unemployment, part-time for economic reasons and marginally attached to the labor force).

Normally (as during 2000-2014) labor costs are negatively correlated with unemployment. Perhaps the Phillips Curve has reversed direction?

Unit labor cost correlation with unemployment
Source: Bloomberg

There are any number of possible explanations for this, including

  1. a very low labor force participation rate that reflects a reserve of prospective workers;
  2. postponed retirement
  3. a cultural change in a labor force that is more concerned with job security than pay gains; and
  4. technological changes.

Whatever the reasons, the fall in labor costs is good for earnings, and helps explain the subdued wage costs we observed in the GDP profit tables:

Corporate sales grow faster than wages
Source: Bloomberg

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