There were 10.7 million job openings in the U.S. in June, with many of those openings in service industries, including health care, hotels and restaurants, retail and professional services. If the U.S. slips into recession this year, businesses are likely to pull back on help-wanted ads. But instead of drastically cutting workers, as in most recessions, companies can hold on to their talent.
Unemployment, currently at 3.5%, now matches the 50-year low last seen in February 2020 before the pandemic hit. Non-farm wage increases averaged 471,000 per month in the period January to July. And in July alone, there were a total of 528,000 job increases. These are astonishing numbers in any economy, but especially as the labor market is at full employment. Companies know that this means that the labor market is tight and that it will continue to be difficult to find and retain workers.
Wages are still rising
Also, wages are increasing for many workers. Average hourly wages are up 5.2% from a year ago, with the biggest gains in leisure and hospitality, education and healthcare and professional services. In addition, wages and salaries for civilian workers increased 5.3% during the year ending in June. These data are yet another signal to companies that the labor market is still tight.
Labor shortages are likely here to stay
Labor shortages remain and are likely to persist even if the United States enters a brief and potentially mild recession. Even as companies begin to scale back production, they know they will still need to find more workers.
First, growth in the working-age population (ages 25 to 54) is slower than growth in the retirement-age population, according to the Congressional Budget Office. Many people who took early retirement during the pandemic are also unlikely to return, as evidenced by the continued weakness in the labor force participation rate among workers aged 55 and over. Furthermore, there were an estimated 888,000 fewer immigrants in 2021 compared to 2016, in part due to stricter immigration laws enacted even before the pandemic began, according to UN net migration data.
Also, many people are still unwilling or unable to work due to lingering pandemic effects. Some still fear infection or have “long-term” symptoms that impair their ability to work. Others still have childcare and adult care challenges. And many workers still leave to find better jobs and opportunities. In fact, fewer people are willing to work two or more jobs given rising wages, especially for job changers.
How businesses can deal with it
The conference board expects that the United States will experience a recession this year that may stretch into next year, but that it may be far less intense than the downturns during the worst of the pandemic and the Great Recession. This recession will likely be induced by the Fed raising interest rates above 3% this year, which will make borrowing more expensive and promote a downward shift in domestic demand that will help cool inflation.
Typically, lower domestic demand means companies first cut back on hiring plans, then lay off workers. This time around, firms are likely to pull back job postings and cut unnecessary costs as they try to hold on to many of their best workers who they have struggled to attract and retain over the past two years.
Service companies, many of which never fully recovered all the workers lost during pandemic shutdowns, may be most likely to keep their employees on the payroll, and they may reduce hours or wages rather than cut costs. Some employers may put workers on furloughs with benefits and possibly a promise to make up lost wages later. Others may delay salary increases, promotions, and future discretionary compensation, or may encourage voluntary early retirement or job separation. Employers can also introduce job sharing, where two people work one job, to keep their best people in the midst of demand.
The bottom line is that massive layoffs don’t seem to be on the horizon. If the impending recession is likely to be shallow and last a few quarters or, at worst, a year, companies are likely to retain their hard-won workers amid a shrinking working-age population. For these reasons, the U.S. economy can escape an increase in unemployment that hurts millions of households, especially low- and middle-income families.