· 5 min read
HR pros in 2022 have heard the term “tight labor market” more times than they can count. But how do you measure how tight the labor market actually is?
“You can’t see labor market tightness,” Julia Pollak, chief economist at ZipRecruiter told HR Brew. It’s like physics: “I can’t see magnetic forces, but you can see the little metal shavings moving,” she said. (Uh, sure.) “It’s the same with…labor market tightness. The evidence for labor market tightness is wage growth [and] job-seeker bargaining power.”
Economists need to consult multiple correlated measures, Pollak explained, to determine how tight the market is, because each metric on its own is biased in some way. Collectively, the indices can paint a picture that’s close to the true employment situation.
Well, that’s how it’s supposed to work.
Traditional measures of the labor market have been more than a little weird recently. Consider the Bureau of Labor Statistics’s Employment Situation update, which uses survey data from establishments and households to measure US employment. Data from the two surveys typically mirror each other, but over the past few months, they’ve diverged. The latest release showed what Pollak called the widest difference yet: The establishment survey suggested America added 263,000 jobs in November; the household survey said it lost 138,000.
So, what’s really going on? We talked with Pollak and Guy Berger, principal economist at LinkedIn, about how to make sense of the conflicting—and frankly confusing—economic releases.
That’s tight? Wages are still growing in the US, up 0.6% this month and over 5% YoY. This would typically indicate a tight labor market, since wage growth, Pollak said, tends to correspond with employees’ bargaining power and may signal a mismatch between labor supply and demand that favors applicants. This might not be the case now, she cautioned, as severance payments may have skewed the results.
There were almost 77,000 layoffs in November—a 127% increase since October, reported Challenger. Pollak said that the observed wage growth could be due to laid-off employees reporting their three-month severance payouts as lump sum earnings for November. If that’s the case, she said it would artificially inflate wage growth. (Economist Julia Coronado echoed this opinion on Twitter.)
Loosen up. There are far more measures indicating the market is loosening. Though the employment situation update appears mixed, Berger and Pollak explained why, in context, there’s good reason to put more weight on the household survey findings.
For comparison, the establishment survey has a little over double the sample size of the household survey. Not to get too nerdy about it, but, as Berger told HR Brew by email, that typically means that, month-to-month, the establishment survey is “less noisy,” because the larger sample size makes it less prone to sampling error. If the household survey results are, as Berger put it, “anemic” compared to, or lower than, the establishment survey for a month or two, it’s typically not a cause for concern.
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“But [the household survey has] now been anemic for eight months. The noise should be washing out,” Berger wrote. The continued discrepancy between the surveys, he thinks, should make economists pause. He added, “I definitely wouldn’t look exclusively at the establishment survey and conclude [that] all is well in the US labor market.”
Pollak went a step further, arguing that the sensitivity of the household survey might make it a better recession indicator than the establishment survey. She explained that because the household survey measures the employment of contractors, small business employees, and self-employed individuals—all of whom she said are traditionally negatively impacted early on in economic downturns—the survey can be more sensitive to “economic turning points.”
The results of LinkedIn’s December’s Workforce Report—which estimates how many jobs were added in November by dividing the number of hires made on LinkedIn by the number of members on the platform—also support a loosening labor market. It found hiring fell by 4.9% in November and 20.5% YoY.
Also concerning, said Berger and Pollak, was November’s decline in temporary jobs, which fell by 17,200 jobs to bring the total available temp jobs to 3.1 million, according to the Employment Situation report. Pollak called the industry a “bellwether” of a recession, while Berger pointed out on LinkedIn that companies looking to reduce labor costs without conducting layoffs may see reducing temp staffing as a “lever” they can pull.
According to the DOL JOLTS data, quits also fell by 2.6% in October to reach 4 million, the lowest level since May 2021. This may suggest employees have less faith in the labor market than they did when they left their jobs at record rates last spring.
Bottom line. Berger stressed that even though the labor market is certainly cooling, it’s all relative. The heat wave may be over, but we’re not in the tundra.
“Go back to what people would have thought of as a job market that’s…a seeker’s market,” Berger said. “It’s less [now] than it was six months ago, but it’s more than it was three years ago.”—SV
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