That ‘70s show? Oil prices and unemployment
Julius Probst, PhD explores how the oil shock is pushing up prices, hitting growth, and weakening hiring across sectors.
Photo Credit: Shaah Shahidh
Oil and gas prices have surged since the conflict with Iran started. Oil price shocks often turn into recessions. The reason is simple. Carbon-based energy remains an extremely important input in today’s economy. As energy becomes more expensive, households and businesses must tighten their belts, and that means lower spending in the economy. So far, so obvious!
But the effects are more far-reaching than that. Central bankers typically need to hike interest rates to contain inflation, which means a slower economy, fewer jobs, and higher unemployment. Some sectors are more affected than others.
What may be surprising is that often monetary policy itself causes or at least contributes to the recession. In this piece, we will discuss the various channels through which energy prices slow growth and what that means for the hiring outlook across sectors.
Large oil price shocks are typically followed by economic downturns
A surge of more than 50% in oil prices relative to trend has almost always been followed by a recession. This was the case for the U.S. (and Europe) in the early and late 1970s (the two oil shocks), the early 1990s, and again in 2008 during the Global Financial Crisis.
The decline in discretionary income reduces consumer spending
Consumption makes up more than 65% of GDP in countries like the U.S. and the U.K. As energy prices rise, household disposable income falls because more money is spent on fuel and heating.
In the U.S., households in the middle of the income distribution (40th to 60th percentile) earn about $67,000 after taxes. However, approximately $52,000 are dedicated to spending on essential items, including basic needs like food, housing, transportation, health care, personal insurance, and pensions.
That means that only 22% of after-tax income — $15,000 — is left over as discretionary income, which can be allocated to food and drinks away from home, entertainment, vacations, personal care and other services.
The typical U.S. household spends about $2,000 a year on electricity and natural gas plus another $2,000 on car fuel. A 30% increase in oil prices could raise the cost of these essentials by around $1,000.
This represents a 7% hit to discretionary income for the median household, leading to an immediate decline in spending on non-essentials items. This usually means fewer leisure activities, eating out less often, cutting back on personal travel, etc.
Europeans tend to spend less on fuel but more on heating. While regulated energy markets can soften the impact at first, the hit to discretionary incomes in countries like the U.K. and Germany will likely be just as high if not higher.
On the business side, companies see their profit margins decline as energy prices soar. Transportation is affected the most since the cost of shipping millions of goods across the economy surges. But other sectors are also feeling the pressure, including manufacturing, hospitality, and retail.
Hotels, restaurants, and supermarkets all face higher energy bills. As profits margins shrink across sectors, so will hiring intentions.
Monetary policy makers typically pile on with interest rate hikes
Most central banks across advanced economies aim to keep inflation near the 2% inflation target. With inflation surging due to energy prices, central bankers usually raise interest rates to slow the economy. The reason is simple: to avoid a repeat of “That ‘70s show” when rising prices and rising wages fed off each other in what is known as the wage-price spiral.
While “good” monetary policy might allow for a “temporary” inflation overshoot above target, central bankers need to be cautious. They will be unwilling to repeat what happened after Russia invaded Ukraine in 2022 when inflation in Europe climbed to 10% and took three years to come back down.
At the moment, shipping through the Strait of Hormuz is unsafe, and global uncertainty remains elevated. Even with a quick conflict resolution, it will take some time for energy prices to normalize. Current economic forecasts suggest inflation is on track to rise by 0.7 percentage points (pp) in the Eurozone, 1.2pp in the U.S., and 1.5 pp in the U.K this year.
Market interest rates have surged in anticipation of central banks to raise interest rates to fight inflation. This is already negatively affecting housing markets and stock prices across advanced economies.
As a result, the oil price shock is slowing economy-wide demand even before central banks have gone through with the rate hikes. Looking ahead to 2026, recent forecasts show a deterioration in the growth outlook of about 0.4pp for the Eurozone and 0.5pp for the U.K.
Side note: The OECD growth forecast for the U.S. shows an upward revision, but this does not reflect the effect of the oil shock. I have used an alternative estimate for the U.S. instead based on projections from EY Parthenon.
Which industries are most exposed to an energy price shock?
The table at the end of the piece summarizes how different industries will be affected by the oil price shock. We distinguish between the supply-side exposure - higher input costs — and the demand-side exposure — lower consumer spending. We’ve also added an additional column for the interest rate shock due to tighter monetary policy.
Unsurprisingly, transportation and warehousing, along with manufacturing are affected the most. Both sectors are highly dependent on energy as an input and suffer when prices surge. They are also relatively exposed to the decline in economy-wide demand. Manufacturing is especially sensitive to higher interest rates
Hospitality is slightly less affected by higher interest, but the sector does suffer immediately from a decline in economy-wide demand. And energy prices squeeze profit margins.
Construction and real estate are highly exposed to rising interest rates because housing demand plummets. In terms of energy exposure, it sits in the middle of the pack.
Education, healthcare, and the government sector are the least affected by rising energy prices and higher interest rates. Government jobs tend to be stable, and healthcare spending is less cyclical.
The energy sector is typically the only one to benefit from the oil shock. However, higher interest rates can be a downside for capital-intensive projects since they raise debt burden and increase financing costs.
What does this mean for recruiters?
The oil price shock means slower growth and higher inflation across advanced economies. No recession yet, but we are one step closer!
Transportation and manufacturing are hit hardest by rising input prices. But hospitality is suffering too, especially as consumers cut back on spending. Recruiters must anticipate weaker job growth and a softer hiring outlook in these sectors.
Additionally, rising interest rates are slowing down economic activity. While some industries will be more resilient — healthcare, public services — a weaker economy will lead to less job creation and fewer hires across the board. Let’s hope that energy prices will start normalizing by end of year.
