Is the Labor Market Back to Normal?

Not completely, but more and more indicators are starting to look that way. 

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Aug 22, 2023

There was so much imbalance in the labor market during the last few years, it’s nice to see some metrics stabilize. Let’s hope it can maintain this trend.

The Stabilization of Job Growth

The U.S. labor market added 187,000 jobs in July, while June’s job growth was (revised down to) 185,000 jobs. This is especially notable given that the average number of jobs added per month in the five years before the pandemic was 190,000.

This means that the last two months were the first since the end of 2020 that job gains were below 200,000. So what? The pace is returning to a sustainable level, and that’s a good thing.

Don’t be surprised if you see the monthly number start to ebb and flow a bit more as we move forward. Even in good years, the month-to-month number is somewhat volatile. During that same five-year period before the pandemic, job gains ranged from 22,000 jobs lost in one month to 388,000 added in the best month, with results scattered between those to bookends.

When the first sub-100,000 month gets reported, expect plenty of pessimistic media headlines, but know that it’s not necessarily a sign that things are falling off a cliff.

Additionally, the jobs being created are not isolated in one industry. I often hear and read that most of the jobs are being created in leisure and hospitality because of how much it lagged in the recovery, and higher paying industries aren’t hiring right now. But the data says otherwise.

Leisure and hospitality added only 17,000 jobs in July. Health care and social assistance contributed almost half of the total jobs added, with a gain of 87,000. Real estate and construction combined for 31,000 new jobs. The professional, scientific, and tech subsector added 24,000 jobs.

Layoffs also appear to be stabilizing. The latest data shows that 239,000 people filed an initial unemployment insurance claim in the previous week. The number has mostly been around that range since peaking at 265,000 in mid-June. This suggests that layoffs aren’t getting worse. For a relative comparison, that figure averaged 244,000 in the five years before the pandemic.

Wage Growth and Inflation Come Into Balance

With layoffs stabilizing and substantial job growth still occurring, the unemployment rate remains near 70-year lows, at just 3.5%. Believe it or not, there is still more demand for talent than there is supply, which continues to put pressure on wages. Annual wage growth was 4.4% in July, and it has been near that rate all year.

One interesting trend with compensation is that job switchers are not getting as big of a pay bump. The Federal Reserve Bank of Atlanta estimates that the average premium for switching jobs peaked at 7.7% late last year, and it has since dropped to 7% in recent months. I expect that trend to continue to head closer to 5% based on what we see in LaborIQ data.

While wage growth is still elevated, other inflation measures have moderated significantly. Annual growth in the consumer price index registered 3.2% in July, in line with expectations and roughly one-third of the peak rate of 9.1% in June 2022. More modest inflation numbers, combined with a normalized labor market, could lead to the Fed pausing interest rate increases.

Looking Forward

The talent supply and demand imbalance — where demand is outpacing supply considerably — is driving wage growth and turnover. While things have started to normalize from the Great Resignation, these trends are unfortunately unlikely to return to pre-pandemic normal.

Plus, elevated rates of job-switching will likely keep compensation growth trends a bit higher, since people typically switch jobs for higher pay.

What does this mean for HR? It’s going to be a bit of time before we start to see annual merit increases below 3%, and compensation analysis may need to happen more often throughout the year. As of now, LaborIQ is projecting 3.5% wage growth next year.

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