The unemployment rate in 2Q23 came in at 8.5%, below both the Bloomberg market consensus and our 8.6% call, as employment growth continues to surprise sequentially. The unemployment rate was 0.7pp above 2Q22, a smaller adjustment compared to 1Q23 (+1pp). On a seasonally adjusted basis, the unemployment rate ticked down 10bps from 1Q22 to 8.4% as employment increased 1.2% QoQ/SA (average quarterly employment growth during 2015-19 was 0.5% QoQ/SA), while the labor force increased by a milder 1.0% QoQ/SA (1.2% in 1Q23).
Job creation over twelve months was driven by private salaried jobs posts. Employment increased 2.2% YoY (2.4% in 1Q23), while the labor force growth slowdown was more evident (from 3.5% YoY in 1Q23 to 3.0% YoY). Private salaried posts increased 2.5% YoY (1.0% in 1Q) and public-salaried jobs rose 4.8% YoY (8.6% in 1Q), while self-employment growth slowed to 1.2% (3.7% in 1Q23). Job growth was lifted by healthcare, commerce, public administration and education, while construction and the real estate sector remained key destructors of jobs. The resilience in the creation of private salaried posts is likely supported by the job creation subsidy (IFE Laboral), accounting for an average of roughly 36,000 new monthly posts in the quarter ending in May (last available print).
Formal employment increased 2.1% YoY (in line with 1Q23), while informal jobs grew a milder 2.5% YoY (3.1% in 1Q23). The participation rate in the quarter reached 60.9% (up 1.2pp over one year, but down from the 1.5pp gain during 1Q23; 62.5% average during 2015-19).
Despite surprisingly positive employment dynamics, complementary indicators suggest the recent improvement is transitory. Proxies for labor demand trend well below pre-pandemic levels and administrative data on layoffs continue to rise. Private sector confidence remains weak, the investment outlook downbeat and labor costs high. We expect the unemployment rate to average 9.0% this year (7.9% in 2022), but risks tilt to the downside. While the labor market is surprising, a gradual loosening has unfolded over the last year in response to the tight monetary policy and prior fiscal consolidation, supporting a narrowing of the positive output gap and the convergence of inflation towards the 3% target and permitting the expected start of the monetary easing cycle later today. We expect a below consensus 50bp rate cut to 10.75%, along with guidance of gradually larger cuts ahead.