About the author: Julia Pollak is chief economist at ZipRecruiter.
There’s a wonky, but passionate, debate raging about whether the US is in a recession. According to the most relevant bond market indicators, investors are betting on a downturn. But there’s one group adamantly rejecting the idea: labor economists.
The labor market in the first seven months of 2022 looks nothing like the labor market in most recessions. Friday’s jobs report was unambiguous. Far from losing steam, the labor market recovery has been firing on all cylinders.
From the start of every postwar recession—and often in the months prior—the unemployment rate has always the rice. Over the past seven months, by contrast, the unemployment rate has fallen from 4.0% to 3.5%, returning to its 50-year low. The economy has added over 3.3 million jobs—topping the full annual total almost every year on record.
Of course, the labor market can turn on a dime. But the key indicators of how recessions typically affect the job market show few signs of weakness.
First, recessions always come with employment losses. It’s basically definitional. Employment and gross domestic product fall together, with a 2% drop in GDP typically accompanying a 1% increase in unemployment (a relationship known as Okun’s law). For all our fancy insurance products and credit instruments, modern recessions are “about as severe when measured in employment losses as earlier ones,” writes Stanford economist Robert Hall. We’re seeing the opposite.
Second, forget the movie trope of office workers exiting buildings carrying cardboard boxes filled with their potted plants and framed photos. Layoffs tend to tick up only slightly in recessions. University of Chicago economist Robert Shimer explains: “Unemployment rises almost entirely because jobs become harder to find. Recessions involve little increase in the flow of workers out of jobs.” We are seeing a slight uptick in initial jobless claims, but no pass-through to continuing claims, and layoffs remain near record-low levels.
Third, the job-finding rate for unemployed people falls and unemployment durations balloon because job openings tend to plummet early in recessions and hires follow suit. The number of job openings fell from 4.8 million to a low of 3 million in the dotcom bust; from 4.5 million to 2.5 million in the Great Recession; and from 7 million to 4.7 million in the Covid recession. The hiring rate so far in 2022 has been 12% higher than in 2019. The drop in job openings in June—the largest on record, outside of the beginning of the Covid recession—could signal a coming slowdown, but then there are still 53 % more job openings than before the pandemic.
Fourth, declines in job openings and hiring tend to be pervasive during recessions, affecting just about every sector. By contrast, the hiring freezes and layoffs reported recently have mostly been confined to sectors such as tech, real estate, and e-commerce that exploded during the pandemic and are now reverting to more normal patterns. And they have been so small as to be invisible in aggregate economic data. Recession-sensitive industries—restaurants, hotels, and airlines, for example—continue to expand rapidly.
Fifth, underemployment rises during recessions. The number of people who wanted full-time work but were forced to settle for part-time roles rose from 4.6 million to 9 million in the Great Recession. In July, that number rose by 303,000, but it remains well before pre-Covid levels.
Sixth, wage growth slows during recessions. It fell from 5.3% in March 2001 to a low of 3.3% in June 2004, for example, and from 4.1% in December 2007 to a cycle low of 1.6% in May 2010, according to data from the Atlanta Fed Wage Growth Tracker. Right now, that source and the Labor Department’s Employment Cost Index show annual nominal wage growth as being higher than ever before and accelerating.
Finally, labor force participation typically falls during recessions and for several years after, because it just doesn’t pay as much to enter the labor market. Labor force participation has been flat or declining in recent jobs reports, which seems almost impossible given rapid growth in payrolls, but this is one indicator to watch.
The average recession lasts about 17 months, but the labor market can take much longer to recover. The most distressed neighborhoods experience persistent declines in employment and population. Men affected by layoffs lose an average of 1.4 years of earnings if a recession is mild, but 2.8 years of earnings if a recession is severe. And unlucky college graduates who start their careers during a recession earn less for 10 to 15 years than those who graduate during economic expansions.
By contrast, labor market recoveries like the one we’re experiencing tend to set off virtuous cycles. Job gains lead to increased wealth and robust consumer spending, encouraging employers to hire even more workers. They also turn up the heat on employers, however, making it ever more difficult for companies to retain and recruit workers. But even those struggles can have a silver lining: Companies become better both at finding and attracting the best candidates.
It’s easy to imagine the labor market going from white-hot in 2021 to red-hot in the first half of 2022, and reaching a more sustainable temperature through the second half. It’s hard to imagine the labor market entering a deep freeze any time soon.
The question, of course, is how much more cold water the Federal Reserve will have to throw its way.
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