How Does the Current Labor Market Factor into a Looming Recession?

Since the pandemic’s onset in 2020 to present day, the job market and economy have followed a rocky path of mass layoffs and sky-high inflation. Millions of jobs are being re-added into the economy yet people are unable to fill these open positions. While the Fed is on a mission to “correct” today’s high inflation, economists suggest that open positions will remain at a record high.?

By Helen Harris?

You likely followed the whiplash in the job market over the past few years: The COVID-19 pandemic and the resulting economic fallout caused significant hardship, which resulted in tens of millions of people losing their jobs. In fact, The Bureau of Labor and Statistics (BLS) reports that the recession caused by the pandemic pushed the unemployment rate to a high of 13% in the second quarter of 2020 and caused many people to leave the labor force.

Fast-forwarding to 2021, the U.S. government tried to combat these job losses by adding more jobs to the economy. However, the U.S. News reported that with more than 11 million jobs open, fewer than one person was available to fill each one.

And more recently, in 2022, you probably became familiar with the term “quiet quitting” and realized that now more than ever, employees have more power to determine their salary, benefits and working conditions. There are so many jobs open and companies competing for your talent. The Economist even called 2022 “The Year of the Worker.”?

These are captivating numbers and facts that make you think. Why are there still so many jobs saturating the economy, and how does this factor into the economy eventually leveling out?

The first step is to fully understand what is happening with the labor market at present.?

Understand the Current State of the Labor Market

It can be jolting to see the current layoffs happening, particularly in the tech sector which many view as a recession-proof career.?

CBS News reported that in January alone, tech companies cut nearly 50,000 jobs, reversing a hiring spree that surged during the pandemic.?

Consider these additional facts it reported:?

• Google-parent, Alphabet, is the latest to slash its headcount. The mega-company recently announced 12,000 layoffs or about 6% of its global workforce.?
• Amazon is moving to cut about 18,000 positions, a downshift that began in November and that will continue into this year.?
• Twitter CEO, Elon Musk, let go of about half of the social media platform's staff of 7,500 people after he acquired the service in October.?
• Wayfair announced in January that it would cut 1,750 workers (or about 10% of its global employees) as it adjusts to falling consumer demand after the home-renovation boom of the pandemic. This is the second round of layoffs for the company, which cut previously eliminated 870 employees in August.

These layoffs certainly had and will have an impact simply because of the brand of the companies. These are FAANG companies or other mega companies that resonate in the minds of job seekers and other employees who will likely then question their own job security.?

But it’s important to remember that this is only a sliver of the job market as a whole.?

“The headline-grabbing, tech layoffs are not the entire labor market,” said Jason Schenker, futurist, economist, keynote speaker, LinkedIn Learning Instructor and 15-time bestselling author. “Additionally, last year — and really for the last couple of years — there have been a lot more open jobs and people.”?

Reuters’ data backs Schenker’s statements that hiring remains strong, despite announcements of thousands of job cuts by technology companies.?

It reports that economists say these companies are “right-sizing” after over-hiring during the pandemic, while smaller firms remain eager for workers.?

Consider the following data from Reuters, reflecting the job market in November 2022:?

• Gains in employment were led by the leisure and hospitality sector, which added 88,000 jobs.
• Leisure and hospitality employment remains down 980,000 from its pre-pandemic level.
• 45,000 jobs were added in healthcare.
• Construction employment increased by 20,000 jobs.
• Manufacturing added 14,000 jobs.

Schenker furthers that the job openings and labor turnover survey (JOLTS) data and the help wanted online data (HWOL) show that there are millions more open jobs now than there were before COVID when the labor market was super tight.?

He explains that while there are fewer job openings than there were a few months ago, there are still millions more open than there were before COVID when the unemployment rate was also 3.5% (which is what it is now).?

“So the extreme surplus of open jobs has been falling, but there's still an extreme surplus of open jobs and not enough people to fill them,” said Schenker.?

Why Is There a Surplus of Open Jobs and Not Enough Labor??

Before you can accurately understand why there is a shortage of workers in some industries and a surplus of open jobs, you have to revisit what happened post-pandemic.?

Michael McDonald, Ph.D., partner at Morning Investments and LinkedIn Learning Instructor, states that one of the major questions since the pandemic recovery began has been “Where have all the workers gone?”

He says despite the pandemic’s impact having significantly receded, labor markets do not seem to be in the same place they were pre-pandemic, but it’s not clear why that is.

“The reality is that the labor shortage pushes wages up, but this in turn pushes up inflation,” said McDonald. “Everything we buy requires labor to produce, and so if this labor costs more, then prices for the things we buy have to rise to compensate. … So to the extent there are fewer workers, it certainly makes it more difficult for the economy to grow, and it also makes it more difficult for the Fed to bring down inflation,” said McDonald.

He states that fundamentally, the Fed is trying to reduce demand enough that the economy is balanced with the new, lower number of available workers. But that means slower economic growth — or even a recession (negative economic growth for a period of time).

Now that you have an understanding of what’s going on now with the labor market and the current issues at hand with the Fed and job market, you may be wondering how the economy will get to a more stable place — and if jobs will be massively affected.?

What Will Happen Within the Labor Market for the Economy to Correct Itself??

For those who experienced the Great Recession of 2008, you may immediately associate the word “recession” with massive job loss, and rightfully so.?

According to Wharton management professor Peter Cappelli, director of the school’s Center for Human Resources, that particular recession was the most significant economic meltdown in the U.S. since the Great Depression, with one in five employees losing their jobs at the beginning and many never recovering or getting real work again.?

But each recession is caused by different factors, and consequently, each one is solved differently.?

For instance, Schenker states that the housing crisis arose from bad credit that led to an implosion and a cascading loss of value.?

“[The situation we’re in now] is different,” said Schenker. “We have a six-cylinder economy, but we were running on eight cylinders. We're trying to downshift from eight to six cylinders. So, it's not because of the consumer credit; it's just things are running too hot.”

With that being said, the direct solution to today’s economic crisis is for the Fed to “kill inflation” — and that’s what they are currently working on.?

“The Fed has two jobs: Low stable prices — which we do not have — and full employment, which we most certainly do,” said Schenker. “The Fed is focusing on killing inflation, and they do this by raising interest rates.

Schenker states that when this happens, it is normal for growth to slow and jobs to decrease. However, he explains there is such a surplus of jobs right now versus people to fill them, that even after this slow-down there will still be millions of surplus jobs.?

McDonald also offers some insight that the key is to not overreact to changes in value in your financial assets (i.e., don’t panic and sell all your stocks because they have fallen in value) but instead try to take a long-term outlook.?

In his LinkedIn Learning video, he states that another way to pad your overall net worth (in any economy) is to diversify your portfolio.??

“Most financial assets are valued based on how much cash flow they generate and what the interest rate is,” said McDonald. “Higher interest rates or lower cash flows both lead to lower valuations. With the Fed raising interest rates and slowing the economy, most assets, such as houses, cars, businesses, stocks, bonds, mutual funds, etc., are going to take a hit on their value.”?

He adds that a second important consideration is your employment.?

“A slowing economy definitely means greater risk of job loss for almost everyone,” said McDonald.

While there is no way you can avoid being laid off or furloughed, you can prepare yourself by making sure you have a strong resume, flexibility in work arrangements and your skills are up to date and valuable to the many other employers who are hiring.?

Top Takeaways

How Does the Current Labor Market Factor into a Looming Recession??

• Prior years and the major events that occurred (Covid-19, labor shortage and jobs added back into the economy) play a role in understanding the current labor market.?
• Currently, there are millions more jobs than people to fill them.?
• “The headline-grabbing, tech layoffs are not the entire labor market.”
• The Fed’s primary focus right now is lowering inflation.?
• Labor markets do not seem to be in the same place they were pre-pandemic, but it’s not clear why that is.
• A slowing economy could always mean the potential risk of job loss for anyone. It’s important to have a strong resume, flexibility in work arrangements, and to make sure your skills are up to date and valuable to the many other employers who are hiring.?