The Big Idea
Learning from the quitters
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. This material does not constitute research.
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.
Quits
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
Source: BLS.
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
Source: BLS.
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.
Layoffs
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
Note: The chart scale does not show the spike to 13 million layoffs in April 2020. Source: BLS.
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.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
