The Big Idea
Learning from the quitters
Stephen Stanley | August 13, 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The record level of job openings and rising wages offer compelling evidence that workers have the upper hand right now in an exceedingly tight labor market. While the hiring side of the equation rightly gets most of the attention, further proof of the strength of labor demand can be gleaned from data reflecting the other side of labor flows, job separations. Record low layoffs and a surge in quits add to the case for vigorous labor demand.
Separations in the JOLTS report
The Bureau of Labor Statistics created the JOLTS report 20 years ago to offer insight into the incredible churn in the labor market. The headline payroll figure for any given month during normal economic times might show a net increase in jobs of 100,000 to 200,000. However, beneath the surface, there are millions of people starting and ending jobs every month, with the payroll figure representing a very small percentage of that churn.
The job openings figure within the JOLTS report garners most of the headlines each month. However, the data on separations offer critical insight as well. As with so much else these days, these figures are moving to extremes, as the labor market remains volatile due to the unusual conditions related to the pandemic.
Back in the 2010s, then-Fed Chair Janet Yellen cited the quits rate within the JOLTS report as a meaningful indicator. At that time, she was looking for evidence that the labor market was weaker than the headline unemployment rate suggested. She asserted at that time that a low quits rate revealed that workers had low confidence in improving their job prospects in the open market and thus were unlikely to switch jobs or demand a raise, indirect evidence of relatively soft labor demand.
These days, the quits rate is showing exactly the opposite. The quits rate moved to a record high in April and through June has been higher than at any other time in the 20-year history of the data, including for the period just before the pandemic when the unemployment rate fell to a 50-year low (Exhibit 1).
Exhibit 1: JOLTS quit rate hits historic highs
In each of the past three months, nearly four million people quit their jobs, close to half a million more than at any other time over the past 20 years (Exhibit 2). It is pretty safe to assume that when workers are willing to leave their jobs in such numbers, they either have a new job already lined up or are very confident in their ability to get something better or more lucrative than the position they left.
Exhibit 2: JOLTS Quits Level
Put another way, roughly 70% of the total job separations in June were quits. That is, over two-thirds of the people who were on the negative side of the labor flows in June walked out of their job voluntarily.
As you might have guessed, with quits making up such a large proportion of total separations, layoffs have dropped sharply. In fact, layoffs in the JOLTS report fell to an all-time low in June and are well below the range seen in the past 20 years (Exhibit 3). Layoffs ran between 1.5 million and 2.0 million a month during the last expansion, even in 2018 and 2019 when the unemployment rate fell to its lowest level since the 1960s. The June reading this year was 1.31 million, almost 20% below the lowest reading in the 2010s.
Exhibit 3: JOLTS Layoffs Level
It should probably not be surprising that layoffs have dropped so low. Surveys and anecdotal reports indicate clearly that businesses across a variety of industries have been desperately trying to staff up to meet burgeoning demand but have been frustrated in their efforts, as reticent workers remain on the sideline. In that type of labor market environment, firms are going to hang on tightly to their current workers as best they can, making layoffs exceedingly rare.
Sidebar: A check on initial claims
Since the early days of the pandemic, all of the changes made to the unemployment insurance programs, most notably the expansion of eligibility and the supplemental benefit payments, were likely to distort the data, limiting their usefulness as a timely indicator of labor market conditions.
The JOLTS layoffs data offer an independent check on the initial claims figures. In 2018 and 2019, when JOLTS layoffs were running on average around 1.8 million per month, initial jobless claims averaged about 220,000 a week, or between 900,000 and 1 million a month. The big gap between the two series reflects the fact that up until the pandemic, only a subset of workers was eligible for unemployment insurance. Their employer would have had to participate in the program, and there were additional rules limiting eligibility. The relationship between JOLTS layoffs and initial claims has varied over time to a degree. For example, in 2006-07, another period of relatively tight labor conditions, initial claims averaged about 320,000 per week, or almost 1.4 million a month, while JOLTS layoffs averaged just shy of 2 million. There is not enough precision to establish an easy comparison between the two, but initial claims have typically run somewhere in the range of 50% to 70% of the pace of JOLTS layoffs, which makes sense given the incomplete coverage of the unemployment insurance system.
Summing the four weeks in June, initial claims totaled nearly 1.6 million—20% higher than the JOLTS measure of layoffs, 1.31 million. The relationship seen in prior episodes of labor market tightness between the two variables suggest that, based on the JOLTS reading for June, initial claims should be running in the low-200,000s at the highest and quite possibly below 200,000 a week. Even with the federal programs and supplemental benefits winding down—they will elapse in less than a month on September 6—the flow of filers remains far higher than broader labor market conditions would dictate.
The takeaway is that we will have to continue to place limited weight on the initial claims data in assessing labor market conditions until the unemployment insurance program returns to its historical rules in the fall.