Aha Dua Permata: Next job-market challenge: the Great American workers Unresignation

Sunday 6 August 2023

Next job-market challenge: the Great American workers Unresignation

FILE PHOTO: A worker arrives at his office in the Canary Wharf business district in London February 26, 2014. Picture taken February 26, 2014.

American workers have given up on quitting. Amid last month’s financial results from Wall Street was a warning from some firms that staff haven’t exited at the rate employers expected. The U.S. economy has weathered inflation without widespread layoffs so far, but a Great Unresignation could make seemingly healthy job numbers harder to read.

Just over a year ago, the financial services industry was one of several facing a labor crunch. Job openings in the industry hit a record 499,000 in June 2022, according to the Bureau of Labor Statistics, as firms’ strong demand for workers clashed with a nationwide labor shortage. That hiring spree has since cooled. The sector added 6,300 jobs last month, nearly half the gains seen in July 2022.

But a big input in firms’ hiring plans is “attrition” – the number of workers expected to quit. Giant lender Wells Fargo (WFC.N) said on July 14 that attrition had been “slower than expected” in its second quarter. State Street (STT.N) gave the same message – one shared by other firms too, executives have told Breakingviews. That creates the problem of headcount costs remaining too high, at least for a while.

Companies generally don’t hope their staff will walk. But when interest rates are going up and workers demand higher pay, attrition feels like a painless way to bring down wage bills. That's not so easy anymore, since the so-called quit rate – the percentage of the workforce leaving their employer – has sunk back to its low levels from before the pandemic. One response is for companies to hire less, and the financial sector’s ratio of job openings to current employees has fallen to its lowest since September. If that doesn’t work, layoffs do. The rate of those is edging higher. Companies have an incentive to defer the moment of wielding the ax though, for fear of seeming more troubled than their rivals. Wall Street’s cull last year showed that once one company takes the plunge, others swiftly follow.

The reassuringly low unemployment of the past 12 months, then, needs to be viewed carefully. It might be a sign that rising rates haven’t hurt the economy. But it might also reflect employees staying put until they’re given a shove. The Great Resignation of recent years was an example of how people can behave in surprising ways, temporarily distorting economic predictions. This season’s corporate earnings may tell whether another surprise is in the works.

CONTEXT NEWS

The percentage of workers leaving their employer in the United States fell to 2.4% in July from 2.6% in the previous month, the Bureau of Labor Statistics said on Aug. 1. The so-called quit rate in the finance and insurance sector dropped to 1.1%, well below a peak of 2.4% in April 2022.

Wells Fargo flagged “slower than expected” attrition as a driver of higher severance costs during the bank’s July 14 earnings call. State Street cited similar pressure from low attrition during its own analyst call on the same day. Citigroup also mentioned severance expenses as a reason for its 9% year-over-year increase in operating costs on July 14.

The U.S. economy added 187,000 nonfarm payrolls in July, the Bureau of Labor Statistics said on Aug. 4. The unemployment rate dipped to 3.5% from 3.6%.

Remnants of the Great Resignation Still Challenge the Fed

The cognoscenti may have been too quick to declare the end of the Great Resignation. The latest Bureau of Labor Statistics data on Thursday showed that the number of workers voluntarily leaving their jobs surged in May by the most since November 2021. On a day of strong labor reports, it might be the most consequential for the fight against inflation. The BLS’s Job Openings and Labor Turnover Survey showed that quits rose by 250,000 to 4 million, about 2.6% of the labor force. Although that’s well below the 3% peak in 2021, it’s comfortably above the highest value recorded before the pandemic.

(Source: Bureau of Labor Statistics data)

Quits, of course, are likely to get short shrift in a week filled with high-profile labor market data, but they may be among the most important. New data from the ADP Research Institute on Thursday showed that US companies added nearly half a million jobs in June, and Challenger, Gray & Christmas Inc. data showed job cuts fell to an eight-month low. But the US has experienced plenty of strong labor markets in the relatively recent past, and most of them haven’t meant much for inflation overall. What’s different now is the frequency with which workers are switching jobs, a phenomenon that has drastically increased worker bargaining power and fueled rising nominal compensation — a welcome development if you’re a worker bee but a minor nightmare if you’re a central banker operating under the logic that wages fuel inflation.

No one’s predicting a return to that degree of job-to-job mobility, but the latest data suggests that a reversion to normalcy may take a bit longer than expected — just a month after some declared the retracement complete.

The influence of quits on inflation has become better understood in the past decade, but the Great Resignation brought it into stark relief. In 2015’s “ Job Switching and Wage Growth,” Federal Reserve Bank of Chicago economists Jason Faberman and Alejandro Justiano found that the quits rate was highly correlated with wage growth. More recently, though, another group of authors from the Dansmarks Nationalbank and Chicago Fed developed a comprehensive indicator of labor market slack that combined unemployment with job-to-job flows. They found that the Great Resignation increased overall inflation by about 1.1 percentage point. In a Chicago Fed Letter last year, authors Renato Faccini, Leonardo Melosi and Russell Miles wrote the following (emphasis mine):

By applying for jobs in a different firm, employed workers can elicit wage competition between the current employer and the new candidate employer. The firm that intends to poach the worker from their current employer has to offer a sufficiently large wage to make the offer attractive. And if a worker is particularly valued by their own employer, they may be offered a pay raise that is necessary to retain them in their current job. In this context, if employed workers search more, wage competition among employers increases, leading to an increase in inflationary pressures...

Although the quits rate rate was stable in the Midwest and West, the latest report showed it climbed in the Northeast and South. Among industries, the rate rocketed higher in construction, where signs have emerged that residential activity may have recently bottomed.

Job vacancies, which were also disclosed in the BLS’s JOLTS report on Thursday, fell more than forecast to 9.8 million, a welcome sign for policymakers that leaves about 1.6 openings for every unemployed worker — the lowest since 2021 but still well above the ratio of 1.2 that prevailed before the pandemic.

But quits, I’d argue, is the more important of those metrics by a significant margin. If you run a company, you probably won’t change your compensation plans simply because a competitor posts a series of openings. If — on the other hand — the job openings go up and your own employees decamp, you’re likely to start paying attention. You’d certainly provide counteroffers to many of the exiting employees, and you might consider off-cycle pay increases for others to head off future defections. The job postings matter, but intuitively, quits matter more.

Needless to say, the picture from the labor market data isn’t necessarily bad — especially if you’re a worker. Strength in US payrolls is likely to further delay — and maybe prevent — the recession that Wall Street has been expecting for the past year. Resilient income streams will sustain consumption in a virtuous cycle. The challenge, of course, comes down the road if wage pressure translates into stubbornly high core inflation, which prompts the Fed to keep policy tighter for longer. Many of us keep rooting for the best of both worlds — a so-called soft landing with a resilient real economy and receding inflation pressures — and the definitive end of the Great Resignation would certainly have helped. Ultimately, though, it looks as if the remnants of the strange pandemic labor market are likely to linger for a while.