Workers Still Have Leverage. That's Killing Your Inflation Story.

The script was supposed to work like this: markets stumble, equity indices fall, companies panic, hiring freezes follow, unemployment rises, wages soften, inflation retreats. A straightforward equation where capital's pain becomes labour's burden.

Except the script has stalled at act two.

Equity markets across developed and emerging economies have delivered what investors feared—negative returns that have sent CFOs reaching for their cost-cutting playbooks. The MSCI World Index has contracted. The S&P 500, despite periodic rallies, has posted years of volatility that would make a prudent fund manager reach for antacids. Japan's Nikkei has lurched. European bourses have been anaemic. Yet here we are, and labour markets remain stubbornly, almost defiantly tight.

This asymmetry—equity weakness meeting labour market resilience—is not a temporary lag. It is structural. And it explains why inflation remains sticky even as central banks hike aggressively and demand supposedly softens.

The United States presents the clearest case. Unemployment sits near historic lows. The job openings rate remains elevated relative to jobseeker numbers, meaning there are still more positions than workers willing to fill them at current wages. The UK tells a similar story: despite economic headwinds and predictions of mass layoffs that never quite materialised, the unemployment rate remains compressed and wage growth continues outpacing headline inflation in most sectors. The European Union, that graveyard of labour flexibility, has seen employment holding firm across most member states despite recession warnings. Japan, a nation more accustomed to labour surplus than shortage, faces persistent recruitment difficulties in healthcare, hospitality, and skilled manufacturing. Australia's labour market has cooled slightly from pandemic peaks, but remains tight by historical standards.

This is the worker's leverage moment. And companies cannot simply discount it away.

When equity markets fall and balance sheets weaken, the traditional recession playbook calls for aggressive headcount reduction. But companies face a constraint they underestimated: workers still have elsewhere to go. Unemployment is not rising fast enough. Wage bills cannot be cut through the simple mechanism of mass redundancy without triggering retention crises among those who remain. The skilled workers whom companies cannot replace fast or cheaply drift toward competitors. Middle-management layers thin too much and operations suffer. And so, instead of cutting, firms negotiate. They offer raises they might not prefer to offer. They maintain headcount they might prefer to trim. They defer the restructuring that quarterly earnings calls hint at but quarterly execution avoids.

This has profound implications for inflation dynamics. Central banks have essentially bet that labour market loosening will moderate wage growth and thus break the back of persistent inflation. But labour markets are not loosening as predicted. A hypothetical 0.5 percentage point rise in unemployment might have been considered loose by standards of five years ago; today it barely registers as tightness having eased at all. The relationship between unemployment and wage growth—the famous Phillips Curve—appears to have shifted. Workers expect wage growth. They have experienced wage growth. They move jobs to chase it. Employers, despite bleaker equity valuations, lack sufficient slack in labour markets to reset expectations downward.

The irony is delicious and painful in equal measure. Capital has absorbed the losses from equity markets. Labour has retained pricing power anyway. The burden of inflation is supposed to fall on workers through their purchasing power eroding; instead, workers are negotiating to keep pace. Companies are caught between equity losses demanding cost cuts and labour markets refusing to deliver the cost-cutting mechanism they expected.

This will not persist indefinitely. Sustained recession and genuinely rising unemployment would eventually break labour market tightness. But the consensus case for sustained deep recession has not materialised in most developed economies. Growth is sluggish, not absent. And while economic forecasts are perpetually revised downward, the severity required to meaningfully loosen labour markets—which would demand unemployment rises of 1-2 percentage points—has not yet arrived and may not.

When you cannot cut your way to margins, you negotiate your way to them. And those negotiations, happening across 30 economies and thousands of companies, have a name: wage pressure. It will not break until labour markets truly do.