For as much as we talk about the labor market, it’s not as clear cut as we (or the Federal Reserve) would like to believe it is.
The truth is, the labor market is a complex thing; demand for and supply of workers shift constantly depending on the industry and location. Therefore, taking one reading of the overall labor market (like the unemployment rate or the openings number) can obscure the true changes occurring in these micro-markets.
Demand for workers – represented by the job openings rate – held steady and high throughout 2022. It’s tempting to respond to this overarching indicator with an overarching explanation: “labor shortage.” But – that ignores the subtleties of the sectors impacted by this underlying explanation.
For instance, healthcare and leisure and hospitality both have very high openings rates, at 8.5% and 8.7% respectively. Demand in both sectors has grown since February 2020, but saying they both have oversized demand would be a simplification. Healthcare, which has been desperate for workers since the onset of the pandemic, is having a hard time filling their positions. The fill rate (measured as hires as a percent of openings) for healthcare averaged 52% pre-pandemic. In 2022, the rate sank to around 38%. It is harder today to recruit in healthcare than it was 3 years ago.
Meanwhile, leisure and hospitality employers can hire workers – but they can’t keep them. The quits rate was at 5.4% in November – by far the highest worker-initiated separation rate across industries. These employers have to keep openings high – their workforces are revolving doors.
For healthcare, their high demand is rooted in recruiting issues – they cannot find the right candidates, perhaps because of the specialized nature of many or their roles or the public’s continued concerns about COVID-19. For leisure and hospitality, it stems from retention issues paired with consumers’ revived appetite for travel, restaurants, and other services.
In the manufacturing sector, it may be a bit more complicated. That sector’s demand for labor is double what it was in 2020. Even as consumer demand leans towards services, goods spending is still way up since before the pandemic – which sparks high demand for workers in manufacturing. Normally, when the Fed starts hiking interest rates, consumers’ goods spending droops. Instead, the demand has remained relatively stable, especially in non-durable goods – and so has the demand for labor.
All three sectors have high demand for separate reasons. So it would be wrong to assume demand can be brought down across all industries at once. There’s no one labor market, there’s no one cause for ballooned job openings, and there’s no one solution – all more obstacles for the Federal Reserve as they attempt to cool the labor market and quell inflationary pressures.
