July 15, 2024

Taylor St. Germain:
Hi everyone, my name is Taylor St. Germain with ITR Economics and welcome to this episode of TrendsTalk. We at ITR Economics are your unbiased and apolitical source of economic intelligence. And today we’ll be discussing the labor market.

It’s been a little while since we checked in on the labor market and given elevated wages, the tightness we’re still seeing in the labor market, I thought it was timely to dive back into some of these labor market trends.

I wanted to first start off with a metric that we’ve mentioned almost every time we’ve talked about the labor market, which is the number of unemployed persons per job opening. If we remember back to about a quarter ago, that ratio was at about 0.86. So for every one job opening 0.86 people, which suggests, again, we don’t have enough people to fill all of these open jobs. Well, as we look at the most recent reading of this data, the unfortunate news that I have, at least for employers, is that the labor market has tightened even further.

Rather than a 0.86 written number, we’re looking at a 0 .68. So now for every one job opening, we only have 0.68 people. So the labor market has really just continued to tighten. And that’s our expectation, not just now, but as we look at the second half of the 2020s, there has been no change in our thought process there.

We have this massive baby boomer generation continuing to retire. The replacement generations under them are not large enough to, at least one for one, replace those baby boomers. And there’s still a lot of demand out there in the economy, even when we’re a little bit weaker today. And I think you can see that in a lot of the jobs numbers, or at least when you look at the jobs numbers in terms of this ratio. So I’m really here to say, over the last quarter though, labor market has really just tightened when you look at that metric in terms of number of unemployed persons per job opening.

Now I continue to, especially I have a feeling as the election is rolling around, immigration tends to come up as one of the hot topics. And as a reminder, we’re apolitical. We don’t care about what party is running the country, but we do care about data and trends, especially as it relates to the job market. And so if you look at the 12 month moving average for job openings, we have about 7.87 million jobs openings as we sit here today. Again, that’s a 12 month moving average. When you look at the number of lawful permanent residents immigrating to the US, that number is only 1.018 million.

So immigration is not enough to offset this tight labor market. It’s really only solving about one eighth of the problem before rounding and being simplistic about this. So yes, immigration and further immigration in terms of increasing the number of lawful residents into the country would benefit, but it’s clearly not solving the tight labor shortage. Again, 1 million lawful immigrants coming into the country and almost 8 million job openings. Immigration alone simply isn’t solving this problem. And that’s why our focus has still been during this slower period in 2024, which when we look at industrial production, we would expect still some sluggish activity to characterize the second half of this year.

We need to think of other ways outside of immigration to improve this tight labor situation. And that’s typically through efficiency investments as we’ve talked about in the past. It’s embracing AI, it’s embracing technology trends. Maybe it’s that new ERP system that you need. It’s really all about making that existing labor force more efficient because the fact of the matter is there isn’t this big pool of labor that’s all of a sudden going to become available. So tight labor market, immigration not solving all the problems and we need to find ways to become more efficient in order to take on all of this attractive economic growth that ITR is forecasting between 2025 and 2029.

I wanted to also cover another area of the employment really looking at wages. And instead of looking at wage inflation like we have in the past, I wanted to reference what we refer to as the employment cost index. This comes from the Bureau of Labor Statistics. It’s capturing all of those employment costs in one index and aggregating those costs together. And as we sit here today, the annual growth rate for the employment cost index is at about 4%. So we’re still seeing about a 4% increase year over year in our costs of employment. Now, some of the good news maybe for employers especially out there is that one of the leading indicators that we utilize to understand where employment costs are going specifically this employment cost index is the US quit rate.

We look at the quit rate on a seasonally adjusted monthly value. And what we can see from the quit rate is that the quit rate has been easing. It’s not that nobody’s quitting their jobs anymore but fewer people are quitting their jobs today than where we were a year ago. And that would suggest that easing in the quit rate will continue to moderate our employment costs. But when I say moderate, I’m not saying your employment costs are going to go down to zero. Maybe our employment costs slow from 4% to 3% by the end of this year but there’s still elevated costs that we’re dealing with.

So as it relates to strategies, we’re going to have to find a way as businesses to offset this continued high employment cost or the 3% to 4% of our costs that are related to employment. So yes, will employment costs slow throughout the year? That’s likely. But again, maybe we slow from 4% to 3% on the aggregate. It’s important to keep some perspective in mind there. Without a major economic downturn in 24, this labor market remains tight.

And our expectation if you tune into the trends report is that yes, GDP will slow in its rate of growth but still grow in that positive territory. Industrial production in the manufacturing side of the economy will spend a lot of time awfully close to that zero line, maybe even slightly below but no major downturn projected. We’re still in the camp of softening in the growth rates and maybe some very mild year over year decline in the industrial economy but certainly not the bottom falling out like downturns we’ve been through like the pandemic or ’08 ‘09.

And that just means this tight labor market is here to stay, especially given some of these demographic trends. I know we’re all interested in this labor market and demographic trends and especially as it relates to our 2030 expectation. Our principles of our company, Brian and Alan Bolio have their 2030 webinar coming up here in July. So I urge you to go to our website and check that out. You’ll hear a lot more around labor market demographics and what it means for the future.

But for now, I hope you enjoyed this episode. As a reminder, please like and subscribe to Trendstalk wherever you listen to your podcasts. And I’m looking forward to seeing you all in the next one. Take care for now.