We continue to receive many client questions about the ongoing US labor shortage, especially with job openings jumping to an all-time high of 8.1 million as of March according to the latest JOLTS report out this week. One underappreciated aspect of the current labor shortage that we don’t see reported is that it predates the Pandemic Recession. No doubt the current crisis has only worsened the issue, between workers fearful of being exposed to the virus by returning to work and the lack of childcare access/virtual schooling needs, to early retirement and a mismatch in workers’ skills. But consider these stats:
- From December 2000 (start of the JOLTS data series) to May 2014, the number of monthly hires always exceeded the number of job openings.
- From January 2015 through this past March, the opposite was true with the exceptions of May and June 2020 as employers started hiring their workers back after mass layoffs from lockdowns.
- As of March 2021 (latest data), available positions exceed monthly hires by 2.1 million, which is an all-time high.
Given that there’s so much more demand (job openings) than apparent supply (actual people hired), the pertinent question is if this discrepancy will lead to systematic wage growth. Below is a chart with the difference in job openings versus hires on the left represented by the blue line and average hourly earnings as a percentage change year-over-year on the right represented by the red line. When the blue line gets above zero, that’s when job openings have surpassed hires. We used a time frame of January 2001 (first full year of data) to January 2020 (pre-pandemic). A few points here:
- During the economic expansion of the mid-2000s, you can see the blue line (openings minus hires) rise and get less negative from 2004 through 2007. As the gap in openings versus hires narrowed over that period, average hourly earnings rose concurrently and reached its best y/y comp of 4.2 percent in December 2006.
After the Financial Crisis, both trended lower together.
- In the last economic expansion, wage growth was choppy and took years to improve given the slow recovery after the Great Recession. That said, it continued to trend upwards along with the rise in openings versus hires.
Job openings consistently started outnumbering hires each month in 2015 and reached a pre-pandemic peak of 1.8 million in November 2018; average hourly earnings responded and hit a post-Financial Crisis high of 3.8 pct in October 2019 at the top of the last economic cycle.
Takeaway: there is a correlation between wage growth and the difference in openings versus hires as employers try to make demand (hires) meet supply (openings) through higher pay. History suggests that the imbalance in openings versus hires should drive wage inflation going forward. That should prove true in the current environment not only because the difference in openings versus hires are currently at an all-time high, but businesses will try to aggressively add to their payrolls in order to make up for losses they encountered last year amid closures and restrictions.
It will still take time, however, for wage gains to materialize. Here are 2 major reasons why:
#1: The US economy and labor market are returning to normal at much different rates across regions, which is skewing the national headline jobs data. For example:
- New York City’s civilian labor force was 4.1 million as of March 2021 (latest available data), which is larger than the total populations (working and not) of almost half (23) of US states. The US unemployment rate is 6.1 pct, but NYC unemployment is much higher at 11.7 pct.
The issue is that not everything has reopened yet, from hotels and restaurants to offices and Broadway theaters. NYC’s local economy and workforce are especially reliant upon tourists and commuters, so without this influx workers may not have access to their old jobs and therefore continue to need enhanced unemployment benefits.
- By contrast, a state such as South Carolina, only has a civilian labor force of 2.4 million and an unemployment rate of 5.1 pct as of March. The 5 boroughs of NYC have almost double the labor force of the entire Palmetto State, but also more than double its unemployment rate.
With South Carolina less congested and reliant on public transportation than NYC, it has been able to reopen quicker. Given these factors and its lower unemployment rate, it makes more sense to end federal pandemic unemployment for its residents as the governor said it would do next month.
Takeaway: the national data will lag what many people see in their local economies, as every region is responding to pandemic conditions differently. Many major cities are not yet fully reopened or back to full speed and are densely populated with people who still can’t get their jobs back. These regional imbalances are why we’ll see disappointing jobs reports like last Friday. It’s also why the enhanced unemployment benefit debate is coming down to a state-by-state basis and why wage inflation will materialize differently by region.
#2: Friday’s weak employment report of only 266k job gains in April is a useful example of how the pandemic has disproportionately affected women, who often need to stay home to care for their kids. For example, the number of employed women (20 years and over) fell by 83k from March to April, while the same metric for men grew by 154k. Some jobs are returning faster than access to childcare, and many schools remain virtual at least part-time.
Takeaway: we are heading into the Summer months when kids are out of school, so the issue of childcare keeping women from returning to the labor force will continue to act as a drag on overall employment. Of course, wage gains will help women get back to work faster if affordable childcare is available, but again, this will take time. We expect to see better numbers in September when kids should be able to fully return to school.
Bottom line: openings less hires is a solid indicator of wage inflation, and history says it should therefore come in time. Anecdotal evidence from the Fed’s latest Beige Book already shows there’s more wage pressures in industries where finding and retaining workers is challenging, such as in manufacturing and construction. The choppy nature of reopenings and labor market improvements by region, along with women being sidelined from the workforce due to childcare responsibilities point to a slower than expected recovery.