JOLTing American Labor Productivity

By admin_45 in Blog

The latest US Job Openings and Labor Turnover Survey was out today for the month of November 2021. Even though this data is a month behind the more widely watched Jobs Report, we always review it because it gives a unique take on the state of the US labor market. On top of that, it was one of Secretary Yellen’s favorite economic reports when she was Fed Chair and current Chair Powell also mentions it frequently.

While we usually analyze the details of the monthly JOLTS data when it is released, today we want to focus on what it can tell us about long run trends in the American labor market. We will shortly be at the 2-year mark for the pandemic’s effect on the US economy, and nowhere is its impact more visible than its effect on workers and employers.

Three points on this theme:

#1: There are now far more job openings than there are unemployed workers. As the chart below shows, from 2001 – 2017 there were always far fewer openings posted by US companies than there were people looking for work. That’s what you’d expect to see. Then, starting in 2018, that relationship changed, and openings regularly exceeded unemployed workers. After a brief return to pre-2018 levels during the Pandemic Recession, the ratio of openings to unemployed quickly returned to form (+1.0x). The latest reading of 1.5x means there are 50 percent more job openings than unemployed Americans.

#2: Workers are still quitting their jobs at record high rates. Pre-pandemic, you could expect to see between 1.2 – 2.2 percent of the US workforce quit each month. As the chart below shows, quit rates are cyclical. During and just after recessions, fewer workers quit their jobs since there are fewer opportunities available. Then, as economic recovery takes hold, the quit rate increases. But look at how much higher the quit rate is right now (November: 3.0 pct) than any prior cycle. Yes, the US economy is doing well just now but that rate is far above any prior expansion.

#3: Hiring rates remain elevated, even 20 months after the Pandemic Recession first hit. The chart below shows that the normal hiring rate from 2001 – 2020 varied between 3.0 – 4.0 percent. The hiring spike as the US economy reopened (6.2 pct in May 2021) was to be expected. That November 2021’s hiring rate (4.5 pct) is still above historical levels is, to our thinking, surprising. We know November’s unemployment rate was 4.2 percent, the same as Q4 2018. Yet the hiring rate in that pre-pandemic quarter was under 4.0 percent.

To recap, when we compare the post-Pandemic Recession US labor market to prior periods, we can see that:

• Employers are having trouble finding qualified candidates from the pool of available, unemployed workers.
• Workers are quitting their jobs at rates we’ve never seen before.
• Employers are still hiring aggressively, presumably poaching staff from other companies.

The question that falls out of this analysis is “what does all this mean for long-run US labor productivity?” A few thoughts on this point:

• Workers are typically more productive once they’ve been in a position for at least a few months if not a year or two.
• Training takes management time and attention.
• Managers who must dedicate significant time to hiring have fewer hours in the day to manage their business.
• Recruiters cost money, often as much as a third of first year wages for the newly hired worker.
• And, of course, some percentage of new hires just don’t work out and the process of bringing in someone new starts all over again.

Takeaway (1): when population growth is structurally slow, as it is in the US (+0.4 pct in 2020), productivity growth becomes the key determinant of long-run GDP growth. In the 2010s, US productivity growth averaged just 1.3 percent. That was significantly worse than the prior decade’s 2.6 percent. What will productivity growth be over the next 5 years, given all the turnover we’re seeing in the US labor market, not to mention the ongoing trend to working remotely versus in an office? One can make both reasonable bullish and bearish cases.

Takeaway (2): larger companies have a clear competitive advantage in facing this productivity challenge. They have the economies of scale to spend on human resources, technology, management, and training. Smaller companies do not have the same advantages, which is yet one more reason we prefer US large caps.