Great news from the semi-annual Labour Force Survey released this week! The number of unemployed Caymanians has reduced by a whopping 30% year on year, from 1575 as of March 2015 to 1,111 in March 2016, bringing the unemployment rate among Caymanians down to a mere 5.6%, the level most economists would consider as full employment in an economy.
I want to pick up on a couple of points raised in the conversations I’ve had about this at Exec Connect and with clients this week, as well as comments posted on the local news websites.
Does low unemployment lead to inflation?
First, I saw an interesting comment on CNS that unemployment was “too low” and in danger of causing inflation. While this is macro economic orthodoxy, as with many well studied and accepted economic paradigms, the normal rules don’t apply here in Cayman. The reason is that in our labour market, which in the private sector is nearly 60% expatriate (depending how you classify permanent residents), there is really no such thing as a lower bound in supply of labour. Increasing demand for labour beyond what the local workforce can provide would normally increase wages as employers compete with one another for scarce labour. But not here. If the local workforce can’t provide the labour, employers can simply make a work permit application (and by definition if there is no available local labour at the price, it ought to be granted). Indeed, inadequate supply of local labour has been a standard feature in most skilled lines of work for decades.
If anything, low Caymanian unemployment could actually reduce labour costs by lessening pressure on firms to hire Caymanians (which often simply means increasing wages to attempt to poach skilled labour from competitors).
This doesn’t mean we’re immune from wage inflation but it does mean we are effectively tied to labour prices across international labour markets. With a vastly more diverse landscape from which to draw talent compared to most western countries, we’re also in the fortunate position of being hedged.
Population increase = reducing unemployment?
The second point I wanted to pick up on is the negative correlation between work permits and general population on the one hand and Caymanian unemployment on the other. While both population and work permits are hitting all time highs, unemployment is plumbing all time lows. This is a well studied phenomenon that makes intuitive sense to anyone that has studied economics. It’s not that increasing population directly reduces unemployment. It’s that both respond to a common underlying third factor, economic activity. Greater economic activity (i.e. economic growth) leads to both population growth and reduced unemployment.
The timing here is useful. As an election approaches, the demonstration that unemployment is driven by something other than the granting of work permits ought to help assuage some of the nativist rhetoric that seems to be sweeping western societies left and right.
Declining GDP per capita
Next, is the apparent decline in per-capita GDP. While population has increased by 3.7% year on year, economic growth is growing more slowly at only 2.4% annualized in the most recent quarterly update. While on the face of it this is troubling (and something the government ought to work to address in the medium to long term), I don’t think we should start setting our hair on fire just yet.
Look at it this way. Tourism is growing; financial services is not. If tourism wasn’t growing then our GDP per capita would look better. But would we be any better off? Not really. So what the declining GDP per capita number means, is that less productive sectors are growing more quickly than more productive ones. While more could certainly be done to help the financial industry grow, holding back tourism wouldn’t help anyone.
The other point about GDP is that it is a number of highly dubious value here in Cayman. The premise of GDP is that the productivity it measures inures to the benefit of the society it is being measured for. Again, not here. A large number of companies in Cayman are foreign owned, meaning that much of the benefit of the productivity inures to non-Caymanian (or non-local) beneficiaries.
This doesn’t mean GDP should be disregarded altogether. It’s seen by most as a blunt instrument at the best of times. And while the total amount of productivity is somewhat irrelevant, as long as the noise is reasonably constant, the movements and trends are still a useful guide to what’s going on in the economy.