The Big Idea
The labor market before and after the pandemic
Stephen Stanley | October 13, 2023
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 labor market went through an unprecedented set of shocks during the pandemic. Millions of people lost their jobs in the spring of 2020 followed by a quicker-than-expected recovery, leading to prolonged and acute labor shortages. The supply and demand of workers is gradually coming back into balance this year. As some of the most prominent indicators of the labor market return to levels roughly consistent with pre-pandemic trends, the key similarities and differences between late 2019 and today point to a gradual moderation in job growth rather than an abrupt collapse.
Setting the stage
In late 2019, the economy was cruising. Real GDP growth averaged over 3% for the year. Payrolls were advancing at a decent but moderate clip, and the unemployment rate was broadly stable at around 3.6%, near a 50-year low. Of course, one key difference between that economy and this year’s is that inflation was quite modest in 2019. Both headline and core inflation ran at about 1.5%, below the Fed’s target. As a result, the Federal Reserve cut rates three times in the second half of the year, taking the funds rate target down to 1.625% by the end of 2019.
Then and now
At first glance, the current labor market situation looks similar in many respects to the late 2019 landscape. Most notably, the unemployment rate is almost identical (Exhibit 1). Job growth is considerably stronger. The rate of turnover in the market is slightly higher now than in 2019, with hires and separations both up a bit, but these figures are also quite close to 2019 levels.
Exhibit 1: Labor Market Then and Now
There are a few key differences, however, between late 2019 and the current labor market. In addition to the pace of payroll gains, job openings remain far higher than the pre-pandemic levels. In late 2019, JOLTS job openings were averaging about 7 million, just shy of the all-time record at the time of 7.6 million, reached in November 2018 (Exhibit 2). During the acute economy-wide labor shortages of 2021 and 2022, job openings surged all the way to a new peak of 12 million in March 2022. Since then, labor demand has moderated, but job openings in August were still 9.6 million, 2 million (or over 25%) above the pre-pandemic high.
Exhibit 2: JOLTS Job Openings
There is further evidence of strength in the JOLTS data on labor market separations. While the overall level is not much different than 2019, the composition is. In late 2019, quits were running at roughly 3.5 million a month, while layoffs were averaging about 1.8 million. In contrast, in August, quits were 3.64 million and layoffs were 1.68 million. While these differences are not huge, they suggest that more of the people leaving jobs are doing so voluntarily, a sign that workers still have more leverage than they did prior to the pandemic.
Job openings breakdown
The JOLTS data are broken down by industry, similar to the payroll figures. Comparing the late-2019 levels for job openings to current readings offers a window into the sectors of the economy where labor demand remains most robust.
Exhibit 3: JOLTS Job Openings by Sector (000s)
These data show that job openings are sharply higher than in late 2019 across a variety of industries. The sectors with the largest step-up in job openings include manufacturing and transportation and warehousing, which is likely a reflection of efforts by global firms to nearshore their operations. Technology (“information”) has done particularly well, and, surprisingly enough, financial activities are up the fastest of all the major sectors.
On the other side, retail trade is the only sector with lower job openings in August than in December 2019. Construction is up only modestly from before the pandemic, and leisure and hospitality and government are lagging the overall gain. It is noteworthy that for the three sectors that were the slowest to recover after the economy fully reopened and thus were playing catch-up in terms of hiring well into 2023, leisure, government, and health care, only health care has sharply higher job openings as of August relative to the overall economy.
While the labor market has cooled considerably from its unsustainably torrid stance in 2022, it remains robust. Many of the highest profile measures of the health of the labor market are broadly in line or stronger compared to late-2019 levels. In particular, the still-elevated volume of job openings serves as a reminder that the demand for workers is still vigorous, which means that job growth will likely moderate gradually, as it has over the past year, rather than collapsing abruptly, as economists have been forecasting for most of the past year.