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The Labor Market: Turnover

July 8, 2022

Employee turnover is one of the most expensive problems businesses face. But, has the turnover rate finally peaked? Learn more about the state of the current labor market with the newest episode of TrendsTalk with ITR Economist and Speaker Lauren Saidel-Baker.

 

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The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.


Hi, I'm Lauren Saidel-Baker. And welcome to this episode of ITR Economics TrendsTalk. Talking today about the labor market. The tight labor market is one of the most critical constraints facing firms today. And while we don't expect the overall labor market to loosen up anytime soon, I can offer you a little bit of hope. Let's call it the light at the end of the tunnel, at least in terms of one important aspect. That is turnover. So the overall labor market is still very tight, and we expect it to remain that way for the foreseeable future. It comes down to a numbers game. There are many more job openings in today's economy than there are job seekers. In fact, it's about a two to one ratio. So even if we could just ignore all of those geographic mismatches, all of the skills mismatches, good luck hiring a CNC machine operator today. Even if we could just take one job seeker and put them in a role, we don't have enough job seekers. We still would be short by about half of the open positions that are out there today.

So while that aspect of the job market won't ease up anytime soon, I can offer you some good news as the data shows turnover. Now, turnover is one of the most expensive problems that businesses face with their employment base. It's easy to see. When someone quits, when they leave their role, you aren't just losing that person, that productive worker, but you then have to backfill the position. There's often downtime in the interim. Then once you do go out and find someone new for that job, well, you have to identify that qualified candidate. You have to hire them away from whatever they are or aren't doing today. And then you have to train them, just getting them up to speed to where this previous productive employee had been can be a very expensive proposition.

So turnover is highly correlated to overall employment costs. Now we as economists track turnover in terms of the US Nonfarm Quit Rate, that's just the measure of everyone leaving their jobs for whatever reason. Sometimes it's to go over to a competitor, a new job, or sometimes it could be other things like going back to school. In the most recent business cycle, we saw a lot of folks leaving the formal labor market to go start their own company. So the number of single proprietorship business formations really shot up. In some cases it's just to do nothing. Maybe a family decides to go down to a one income and that other spouse is staying home. Again, we saw a lot of this during the pandemic, as those kids were doing remote schoolwork, families said maybe we should have one spouse stay home, watch the kids while they do that remote schooling.

So for whatever reason, we had seen that quit rate spike higher, especially during the pandemic and into 2021. But more recently, the 12/12 rate of change for our us Nonfarm Quit Rate has started to tick back down. Now the change is still tentative at this point, but it does seem like a peak has formed. All of our leading indicators are reasonably consistent. That preponderance of evidence shows that further decline in that growth rate is very likely. So what does this mean for businesses? Well, there are still a huge number of job openings out there. There are a lot of opportunities, so I'm not saying that it won't continue to be an employee's market. But, I can offer a little bit of relief. At least as far as that turnover goes. It seems like in some cases, everyone who was going to leave likely has left by now. That so called great resignation, storm the headlines, and we all heard about it. We all made our own assessments.

And in some cases we're hearing at least anecdotally that the grass might not have always been greener on the other side, I've had a lot of conversations with clients that have said some of those employees that left early in the pandemic have started inquiring is my old job still available? Maybe that grass wasn't greener. So be flexible, be tactical. We are not suggesting a significant shift to a looser job market, at least not yet. And while we don't expect a significant contraction, that isn't likely to happen this business cycle. So it's about being flexible, being tactical. More than anything, keep your productive workers. Retention will be critically important for your own cost. Stay out ahead of this trend. Thank you so much for joining me today for ITR Economics TrendsTalk, I'm Lauren Saidel-Baker. Let's talk again soon.

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