Of all recent economic trends, sluggish employment growth is perhaps the most important for investors to watch, for three reasons.
First, because it’s holding back growth and fueling inflation pressures. Second, because it makes it harder to reduce income inequality. Third, because it undermines future employment growth by slowing the build-up of skills in the labor force and pushing companies toward automation.
What is happening to the US labor market, and why? Below I assess the five key issues:
- Lower labor force participation
While labor demand has been recovering at a strong pace, many workers don’t seem to want to get back into the game. Labor force participation suffered a prolonged decline between 2000 and 2015, stagnated for a few years, and finally began a timid recovery in 2018-19, but the pandemic lockdowns knocked it down again and now it seems unable to get back up.
This is partly due to older workers who decided to retire earlier (the 65+ age labor force is running approximately 1 million workers below the 2007-2019 trend); but partly to younger workers sitting on the sidelines—the participation rate for people of prime working age (25 to 54 years old) is 1-½ percentage points below the pre-COVID peak.
- Rise in job switching
Much like in real estate, it’s a seller’s market. US job openings hover at around 11 million, and with lots of work opportunities on offer and limited competition, more workers are quitting their jobs: with the exception of the financial services and information industries, quit rates are well above their 2017-2019 average, and they correlate rather well with the abundance of job openings (also measured as excess over the 2017-2019 average). Quit rates are especially high in leisure and hospitality, but well above pre-pandemic levels also in manufacturing, retail trade and wholesale trade.
Quitting pays: wage gains for workers who switched jobs are much higher than for those who stayed in their current positions.