High job openings signal wage-price spiral

Putnam Fixed Income team, 10/24/22


  • Following the recovery of the labor market to pre-Covid levels, it is puzzling to see large job vacancies today when the economy is at or above full employment.
  • Limited labor supply along with firms willing to offer higher wages amid a high staff turnover seems to have initiated a wage-price spiral. Large job openings are just a manifestation of this.
  • Without a broad-based decline in wage inflation and job openings, the Fed will find it difficult to pivot toward rate cuts, even to address financial stability concerns.
In the post-Covid world, job openings have been unusually strong. Before the pandemic, there were about three openings per 100 jobs already in payrolls. In the pandemic era, the average job openings per payroll employment rose to 5.6%. It is now 6.2%.

Job openings started to rise in the second half of 2020 and gathered steam in 2021. By July 2022, U.S. payroll employment fully recovered to pre-Covid levels, but job openings remained elevated. While it might be easier to explain large job vacancies if total employment were well below the pre-Covid levels, it is puzzling to see large vacancies when the economy is above full employment.

Above-trend job opening/vacancy rates are similar in the U.S., the U.K., and the eurozone.

U.S. job openings rate

job openings

Source: Bureau of Labor statistics, U.S. job openings rate (% of total employment), 12/31/00–9/30/22. For illustrative purposes only.

Eurozone vacancy rate

eurozone vacancy rate

Source: Eurostat, eurozone vacancy rate, 3/31/04–8/31/22. For illustrative purposes only.

U.K. all industry vacancy rate

all industry vacancy rate

Source: U.K. Office for National Statistics, U.K. all industry vacancy rate, 1/31/01–9/30/22. For illustrative purposes only.

The role of business expansion plans

The U.S. economy grew rapidly in 2021 as the post-Covid normalization was in full swing. It is possible that firms raised their expansion plans with the expectation that good times would last forever. Businesses tend to make investment and hiring decisions based on their recent experiences. However, this behavior does not necessarily translate to job openings, which do not seem to have any forward-looking properties or strong correlation with payroll employment. For example, “net job openings,” or job openings minus separations, stayed negative from 2000 to late 2014, while the overall employment growth was positive despite two recessions in the period. There seems to be a positive relationship between job openings and employment, but not a strong one.

How the pandemic changed sectors

The effects of the Covid pandemic might be causing short-term mismatches between the skills businesses seek and those workers offer. The pandemic affected sectors differently. Early on, some sectors looked like significant beneficiaries while others were disadvantaged. For example, consumption of both durable and nondurable goods surged soon after the start of the pandemic and has not yet returned to previous trends. Online spending seems to have structurally increased. The transportation and warehousing sector, which facilitates online spending, has likely benefited from this shift. Employment in transportation and warehousing is now well above the pre-pandemic levels. Job openings in the sector are also elevated, but in line with employment growth.

In contrast, many sectors have emerging gaps between employment and openings. Among the twelve main industry groups, the job openings rate in transportation and warehousing, currently at 6.7%, is high but not the highest. Information, professional and business services, and health care are the three main sectors with exceptionally high job openings and wide employment openings gaps. Like transportation and warehousing, these sectors had been on an uptrend before the pandemic. It is possible that the pandemic has accelerated the structural change, increasing the sectors’ demand for labor.

The health care and education sector shows a wider gap between job openings and employment than the transportation and warehousing sector

Health care and education services: Employment and job openings

health care and education services job openings

Source: Bureau of Labor Statistics, Education & Health Services, payroll employment and job openings, 12/31/00–9/30/22. For illustrative purposes only.

Transportation and warehousing: Employment and job openings

transportation and warehousing job openings

Source: Bureau of Labor Statistics, Education and health services, payroll employment and job openings, 12/31/00–9/30/22. For illustrative purposes only.

One can argue that jobs in health care, information, or professional and business services require higher education, and because engineers and doctors are not made overnight, a skill mismatch has developed. Such a mismatch could probably correct over time as workers upgrade skills to earn higher incomes. As such, it might be possible to justify large job openings in sectors benefiting from the pandemic or sectors on a structural uptrend. However, elevated openings in sectors with incomplete or late recoveries, especially in those that do not require higher education, are more perplexing. The demand recovery in accommodation and food services, for instance, took time, but job openings rose quickly, starting in early 2021. Before the pandemic, the demand for leisure and entertainment was strong and employment was high, yet job openings were not this high. Consider that demand for hotels and restaurants does not diverge from population growth trends, despite some cyclical volatility. Also, personal consumption of leisure has not even returned to pre-Covid trends.

High job openings in the leisure and hospitality sector suggest tight labor supply rather than a skills mismatch

Leisure and hospitality: Employment and job openings

leisure and hospitality job openings

Source: Bureau of Labor Statistics, Leisure and  hospitality, payroll employment and job openings, 12/31/00–9/30/22. For illustrative purposes only.

In 2020 and 2021, poorly designed pandemic programs disincentivized people to work, which might have reduced the available labor pool for the leisure sector disproportionately. Now, though, the pandemic transfer programs and excess savings of those at the low end of income distribution are long since over. It is notable that after the pandemic programs ended, the labor force participation rate began to increase in early 2022, and the job openings rate in leisure started to come down from its highest levels. The post-Covid labor supply is still limited and the labor force participation is low, so job openings are still high.

Structural labor supply bottlenecks

If we think of job openings as a measure of labor market tightness, rather than as a measure of labor demand, we can explain the level and changes in leisure as well as in other sectors. A job opening that is filled quickly does not remain in the data as a job opening; persistent openings mean labor is difficult to find and retain.

A positive relationship exists between quit rates and job opening rates: The sectors with high job openings rates are also the sectors with high quit rates. When quits and retirements rise, job openings rise even more. Perhaps, as staff turnover picks up, firms increase job openings disproportionately. The motive might be precautionary, and many firms may be doing this now while the supply of labor is limited.

This dynamic is clear across major U.S. sectors and in sectors with more severe (short-term) labor shortages, the wage increases have been stronger. It is striking that in sectors on a structural uptrend, the job openings rate and wage-growth-per-quit rate are stronger than in sectors on a declining trend, like retail trade. This means the pandemic-enhanced structural change has potential to explain the sectoral variation in job openings and wages although the overall trend is determined by macro factors. Elevated job openings, quits, and wage inflation are manifestations of a tight labor market.

Sectors on a structural uptrend have faster growing wages and quit rates

Wage inflation versus quits rate

Wage inflation versus quit rate

Source: Bureau of Labor Statistics, quits rate and wage inflation. Wage inflation represents the year-over-year change in average hourly wages as of 9/30/22. For illustrative purposes only.

The tightness in the labor market seems to have changed firm behavior with increased job openings and wage offerings and started a wage-price spiral. To go back to pre-Covid labor market dynamics, we would need to see fewer job openings, less attractive wages, and fewer quits. While an increase in labor supply might also be helpful, the U.S. post-Covid demographics do not have that amount of flexibility [see Covid-related labor imbalances complicate Fed's inflation fight, August 17). Consumers need to spend less money and firms need to both hire less and fire some workers to correct the froth in the labor market.

Possible inflection at hand

Job openings are now down a bit from high levels, owing partly to an improved labor supply and partly to declining demand, as firms facing slower demand growth are becoming cautious. However, job openings are still elevated, and wages offered to job switchers are still growing at a rapid pace. We are at the early stages of this adjustment. Without a broad-based decline in wage inflation and job openings, it looks hard to stop this inflation train.

Nobody knows how much of a drop in job openings will suffice to bring inflation back to the target. The changes in employment, wage rate, quits, and job openings as well as CPI inflation will guide the Federal Reserve. Because all the forecast models have been failing badly, the Fed is now data dependent. A sustained change in wage and price inflation will let the Fed pivot. A pivot on financial stability concerns can happen only if the instability in financial markets is coming with material job losses.

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