Just How Tight is the Labor Market?

Last week, Chairman Powell dedicated a significant portion of the Federal Open Market Committee (FOMC) press conference to discuss the Fed’s intention to weaken the tight labor market in order to prevent wage-push inflation from becoming entrenched. Currently, the Atlanta Fed’s Wage Growth Tracker is recording a 6.4% year-over-year increase in wages. However, despite a 4.25% increase in the Fed Funds Rate causing borrowing costs to rise, little progress has been made in this regard. The ratio of unemployed persons per job opening, a common metric for labor market tightness, is significantly below normal levels, indicating that the economy is near full employment.

Investors have shown a clear understanding of the importance of suppressing the labor market in order to reduce headline inflation, as demonstrated by their reactions to positive and negative labor market news (as discussed here). This has led to increased focus on layoffs and has caused stories of major companies reducing their headcount to receive significant attention. However, the data do not suggest that this is a widespread phenomenon. Layoffs, as measured by the BLS’s JOLTS report, have been well below the average level for the period between January 2015 and January 2020 since the start of 2021.

Looking at layoffs by sector, only three categories – information, nondurable goods manufacturing, and transportation – saw layoffs above the benchmark level in October. The information sector, which includes various tech jobs, was specifically mentioned by Powell during last week’s speech as the only category experiencing significant weakening.

The graph below shows average monthly layoffs this year as a percentage of the benchmark by sector. This view reveals that only the nondurable goods manufacturing and information sectors have consistently had monthly layoffs at or above the average level between 2015 and 2020.

Comparing the data from October 2022 and January 2022 shows that the information sector has consistently seen the highest number of layoffs. Interestingly, employment in the financial sector, despite record losses in both equities and fixed income, has remained relatively stable with layoffs 30% below the benchmark average in October.

Sign Up for a Free Trial