Focus
May 06, 2022 | 13:15
The Not-So-Great Resignation
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
The Not-So-Great ResignationThe North American job market is still trying to find a new equilibrium after being knocked seriously off balance by the wild swings of the past two years. April’s moderate employment gains in both economies are arguably the most ‘normal’ figures we’ve seen since the pandemic began, and suggest that conditions are finally stabilizing—at least in terms of the headline numbers. For instance, unemployment rates are essentially right back to (the ultra-low) levels prevailing in early 2020, and employment has nearly recovered by most metrics (U.S. payrolls are still 0.8% below the 2020 peak). Even so, the job market is clearly far from normal, emerging from the pandemic with some of the tightest conditions ever seen, wage pressures rising rapidly, and the balance of power clearly shifting to employees. Yet, participation rates are recovering, and the economy is poised to slow (potentially markedly so). Which of these powerful forces will prevail for the inflation outlook in the coming year? |
|
Besides the near-complete recovery in U.S. employment, another key point is the ongoing rapid rebound in the participation rate (Chart 1). As a reminder, the participation rate—or part rate—is the share of the adult population who has a job or is looking for a job. While the overall part rate remains 1.2 percentage points below its pre-pandemic level, this downward drift reflects the aging population (the share of adults above age 64 is rising steadily). Instead, we will focus on the part rate for those aged 16-64, typically seen as the traditional working age cohort. By that measure, conditions have now fully normalized, with the part rate precisely back to pre-pandemic highs in April. Suddenly, the so-called Great Resignation is looking less than great, as Americans flock back to the workforce amid rising wages, surprisingly rapidly rising living costs (i.e., 8.5% inflation), and fading COVID concerns. Indeed, the prime age participation rate has just matched its highest reading since 2010. Note that the Great Resignation was largely a U.S. phenomenon—it never really happened in other major industrialized economies. Referring back to Chart 1, Canada’s prime age part rate fully recovered within the first year, and has hit all-time highs in recent months. While likely everyone has an anecdote about someone they knew who retired early during the pandemic, that was the exception, not the rule. And, it’s not just Canada where the Great Resignation lasted only months. The part rate in the European Union quickly rebounded to hit a new high—and was recently above U.S. levels for the prime working age population (Chart 2). That is in staggering contrast to conditions prevailing just 15 years ago, when the U.S. part rate was over 8 ppts above its EU counterpart. |
|
Looking further afield, part rates in Japan and Australia have also marched higher in line with Canada to well above pre-pandemic levels and are at, or close to, record highs (Chart 3). And note that the levels of participation in these three economies are well above those in the U.S. and the EU. (That’s a big change for Japan—as recently as 2010, it was lower than the U.S.) Why was the U.S. economy so specifically affected by the Great Resignation? We would put it down to four major factors, most of which are related to its very different response to COVID, and the fact that more Americans caught the virus:
Given that each major factor is related to the COVID response, it stands to reason that as the pandemic fades, the divergence between the U.S. and other major economies will fade. This drives home the point that the Great Resignation will ultimately prove to be a temporary phase, as it did in other economies. Still, that’s not to say all is normal in the job market—far from it. Perhaps the most telling feature is the overhang of a record 11.5 million job openings, stacked up against less than 6 million people counted as officially unemployed (Chart 4). Suffice it to say that it’s extremely unusual to have more openings than job seekers, let alone a ratio of almost two-to-one. Looking at the same data through a different lens, the unemployment rate normally tracks almost perfectly inversely with the job openings rate (Chart 5, which is another take on the Beveridge Curve). But in the past two years, as the jobless rate has come back down to pre-pandemic levels, the job openings rate has moved to extremes. In fact, just to give a sense of how out-of-whack the market is, the current job openings rate in normal times would be consistent with a negative unemployment rate—an impossibility. (You can’t be negatively unemployed.) |
|
The flip side of this exceptionally taught job market is the great deal of churn. For example, a record 4.5 million Americans quit their job in March, or a whopping 3.0% of the workforce. But this “Big Quit” is an entirely separate issue from the Great Resignation, since the vast majority of these “quitters” are turning around and taking a different job (Chart 6). That is, new hires have soared in the past year to reach 6.7 million in March, thus fully keeping pace with the quit rate. This reflects a healthy job market, where employees feel emboldened to seek greener pastures, as well as hearty wage increases. One final note on the lingering 1-point drop in the U.S. participation rate from Feb/20 levels. If Americans were truly walking away from their jobs for early retirement, we would expect to see that reflected in deeply lower part rates for those aged 55-64, or even 45-54. But that just hasn’t happened in any obvious way. The part rate for those 45-54 so far in 2022 is down a moderate 0.9 ppts from 2020Q1, and is in line with its 20-year average. Meanwhile, for those 55-64, the part rate is all the way back to pre-pandemic levels and is within a few ticks of a record high—so zero signs of a wave of early retirement there (Chart 7). It turns out that the age groups with the biggest drops in participation in the past two years have been at the extremes—those aged 20-24 (down 2.8 ppts) and those 65 and above (down 1.4 ppts), with the former likely reflecting a higher share choosing to stay in school and the latter likely dropping out due to health concerns. |
|
Bottom Line: The U.S. participation rate has been recovering rapidly in recent months, and may well soon leave the Great Resignation rhetoric in the dust, as has been the case in almost all other major economies. However, the mismatch between the demand for workers and the supply is still very real, and that is the case almost everywhere. In a sense, we are right back to the tight conditions prevailing prior to the pandemic, but with a steaming inflation backdrop loaded on top. So, even with workers returning to the labour force, the combination of decades-low unemployment, record job openings, and pay rises trailing far behind consumer price increases, it appears that wages have only one way to go—higher. |