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The Labor Market Is Cooling Without Layoffs (So Far)

Author: Andrew Flowers
04 Oct 22

Job openings declined sharply while layoffs remained low. Could the Fed’s “soft landing” be pulled off?

The best word to describe the labor market of the past two years is “tight.” But in August that may have begun to change: The number of job openings declined by over one million, from 11.2 million in July to 10.1 million in August. It’s a sharp decline and the precise goal of the Federal Reserve. The Fed has signaled that, in order to curb inflation, the red-hot labor market must be cooled. 

Since the COVID recession of 2020, job openings have far outpaced the number of unemployed people to fill them. That imbalance is beginning to correct itself, as the Fed has aggressively raised interest rates to tamper labor demand. The ratio of unemployed people to job openings was around 2-to-1 earlier this year. Now, it’s closer to 1.7-to-1.

The fear, of course, is that the cure could be worse than the disease – that in attempting to cool the labor market, the Fed triggers a recessionary spike in unemployment. But layoffs remain very low; companies are hesitant to let go of the labor they have. In August, the overall layoff rate ticked up from 0.9% to 1.0%. In aggregate, layoffs rose from 1.39 million to 1.46 million. Historically, that’s still a tiny number. Higher-frequency indicators like initial claims for unemployment benefits, which had begun to rise a bit this spring, have fallen back to pre-COVID lows. 

One area of concern: Quitting remains elevated

High quits rates show that workers are noticing their high demand – and acting on it. In August, the quits rate was unchanged at 2.7%. After reaching highs in late 2021, the rate has trended downward, though has not fallen to pre-COVID levels. 

Today, the Fed may be concerned that the quits rate remains above trend. The central bank hopes to see fewer people opting to leave their jobs in search of better opportunities, and thus slower nominal wage growth. A high quits rate is usually a leading indicator that wage growth will be strong – fueling inflation further and therefore worrying the Fed. 

Overall, the Fed must be encouraged by the August JOLTS report. With an aggressive hike in rates, the Fed hoped to see labor demand fall. So far, that’s on trend. But inflation remains stubbornly high, and an elevated quits rate could be a sign that wage growth might continue to be strong in the future. For today at least, the hopes for a “soft landing” remain alive.

Chief Economist

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