Is it Really a ‘Job-Rich' Recession

In the early 1990s and early 2000s in the US, we saw what were called ‘jobless recoveries'. The labour market then was unusually slow to pick up in the aftermath of the recession. In this global recession, the labour market in Singapore seems to be showing a contrary trend. To be sure, the labour market is a lagging indicator. Employment growth in Singapore lags GDP growth by around two quarters. On the way up, corporates are usually slow to add to headcount, preferring to increase overtime hours for existing workers until the macro recovery firms. On the way down, human resource management simply cannot be as precise as just-in-time inventory management. The demand shock tends to be absorbed first by the profit cushion before the wage cost containment exercise starts.

The lag effect not withstanding, at first blush, the quarterly net employment decline in 1Q09 (-1,000 preliminary) looks a tad resilient amid what is likely the worst recession in Singapore's recorded macro history. In 1Q09, the overall unemployment rate reached 3.2% (versus the high of 4.8% during SARS in 2003) and the resident unemployment rate stood at 4.8% (versus the high of 6.3% during SARS). Analyzing net employment trends against output growth trends for the eight quarters before and after the start of the recessions in the 1997, 2001 and 2008 cycles lead to the same findings:

1) In the four quarters since the recession started in 2Q08, GDP growth has averaged -3.3%Y. This is about 1-4pp lower than in the 1997 (+1.0%Y) and 2001 (-2.2%Y) cycles. However, quarterly net employment has seen an average increase of +36,850 versus +4,675 in 1997 and -25 in 2001.

2) In the four quarters since the recession started in 2Q08, quarterly manufacturing growth has averaged -14.1%Y, 3-16pp lower than in 1997 (+2.4%Y) and 2001 (-11.0%Y). However, the average quarterly net employment decline of -3,050 was marginally better compared to -4,050 in 1997 and -3,800 in 2001. Specifically, net employment in the petroleum and chemical industry (quarterly average of +2,633 in the three quarters since the start of the 2008 recession) appears to have been better than expected compared to historical trends (+67 and 0, respectively, in the three quarters since the start of the recession in the 1997 and 2001 cycles), although average growth momentum has been slower (-5.3%Y versus +11.6%Y in 1997 and +2.4%Y in 2001).

3) In the four quarters since the recession started in 2Q08, quarterly services growth has averaged +1.4%Y. This is higher than the average of -0.2%Y in the 1997 cycle but lower than the +1.6%Y average in 2001. However, the average quarterly net employment increase in this cycle was much higher at +25,050 compared to +6,075 in 1997 and +9,350 in 2001. Specifically, community, social and personal services (which include education, public administration, health and other social services), business and real estate services, transport, storage and communications, hotels and restaurants, and wholesale and retail saw more resilient job loss elasticity compared to past recessions.

Making Sense of the Labour Market ‘Paradox'

Prima facie evidence points to a more resilient labour market and what looks like a phenomenon in a few other Asian economies as well. The factors driving the resilience will have implications for what pans out later.

In our view, the lagged nature of capex expansion explains what looks like a relatively resilient net employment trend for now. Although the demand shock post Lehman was swift and sharp, putting a drag on headline growth, aggressive capacity expansion plans commissioned during the bull years in the not-too-distant past are being completed even now. Historically, hiring has been strongly tied to capacity additions/capex trends rather than GDP growth per se. Indeed, through our channel checks, we note that hiring in pockets of the economy has not been driven by stronger end demand (demand growth has been poor, as data suggest). Rather, we are seeing hiring in areas where previously commissioned capex plans have now come onstream. Tying in with our findings in 2) and 3) above, recruitment in pharmaceuticals/healthcare/chemicals was on the back of new plants having been completed. Recent new retail malls have also supported retail hiring, and the same story applies for the hotel segment with new supply additions. Strong construction activity due to these capex plans has also supported employment in the construction sector, lending strength to the headline jobs data.

Interestingly, while capex momentum has supported recruitment in the interim, it has not stopped labour market adjustments from being borne out in terms of compensation. Despite what looks like relatively slower job losses, real monthly earnings have still seen worse declines compared to the 2001 cycle. This is supportive of the fact that hiring is driven by previously committed capacity expansion plans rather than end demand, which tends to be inflationary.

Macro Implications

Slower job losses should support confidence and backstop the final phase of the macro slowdown, where a rise in unemployment spills over to domestic demand. The problem is that the consumers themselves seem to have low conviction, either because they expect more job losses in the pipeline or because income growth is a more important factor in spending patterns. Indeed, retail sales momentum has reached the lows seen in the 1998 crisis, when domestic confidence took a hit.

Policy measures such as Skills Programme for Upgrading and Resilience (SPUR) and the Job-Credit Scheme were rolled out late last year and earlier this year, respectively, and with only 1Q09 jobs data available, the jury is still out on how effective these measures have been. However, if the seeming resilience of the labour market is being supported merely by the lagged nature of capex, and not by other structural factors such as stronger corporate balance sheets supporting stronger employment ability, we suspect that the labour market disconnect would be temporary and job losses could soon catch up when the capex recession invariably intensifies