Market Insights | The US Labour Market: The Unfolding Post-Pandemic Story

By Cornelius Zeeman & Jacques Haasbroek,
Fairtree Portfolio Manager & Equity Portfolio Manager & Analyst

Impact of the Pandemic.

 

The labour market is a key driver of growth and inflation within the US economy and has seen major developments over the last few years, which we will unpack in this article.

The COVID-19 pandemic had a massive impact on the lives of individuals suffering from the virus and the global economy due to the various levels of lockdowns imposed by national governments. In the US, employment fell by 25.5 million in March and April 2020 from its peak of 158.7 million in February 2020 – this represents an employment decline of 16% and dwarfs the 5.8% decline during the 2008 Global Financial Crisis (see Graph 1 below).

Graph 1: US Employment (million workers)

Source: Bloomberg, Bureau of Labor Statistics

Demographic Shifts: Navigating the Ageing Workforce.

 

Post-COVID-19, individuals faced a difficult job market, and those close to retirement age chose early retirement and permanently exited the labour force. The labour force participation rate evidence this impact; while there was an initial drop in the labour force participation rate, individuals younger than 55 returned to the labour market, whereas the participation rate for the 55+ individuals hasn’t experienced a comparable rebound in their participation rate (see graph 2 and 3 below).

There has also been an overall slowdown in US labour force growth. Labour has grown at a compound annual growth rate of 0.7% from 2010 onwards, compared to a compound annual growth rate of 1.6% from the 1960s to the end of 2010. The main reasons are the ageing demographic profile of the US population and more restrictive immigration policies in recent years.

Graph 2: Total US Labour Force Participation Rate (%)

Source: Bloomberg, Bureau of Labor Statistics

Graph 3: Labour Force Participation Rate

Source: Bloomberg, Bureau of Labor Statistics

Tight Labour Market.

 

As the world got to grips with the impact of COVID-19, governments reopened their economies and borders to travel. The US economy rebounded strongly from the brief recession, resulting in a strong rebound in the demand for labour. Job openings soared to a record high, with over 12 million available in March 2022. The availability of workers to fill these positions normalised quickly from its peak of 23 million to be roughly in line with the pre-pandemic trends by March 2022 (see graph 4 below).

Graph 4: US Job Market: Job Openings vs Job Seekers

Source: Bloomberg, Bureau of Labor Statistics

These factors resulted in a squeeze in the labour market, with the unemployment rate decreasing to a near-50-year low of 3.3% in April 2022 and more than two available jobs for every available worker. 

Along with the decreased unemployment rate, consumer balance sheets had strengthened with excess savings from government stimulus and the wealth effect from increasing asset values. Workers’ bargaining power increased, and businesses had to pay higher wages to attract employees, as depicted in Graph 5 below – the Atlanta Fed Wage growth increasing by 6.7% year-over-year in June 2022. Quit rates increased as the labour force grew confident in finding higher-paying jobs (see Graph 6 below).

Graph 5: US Labour Market: Job Openings/Unemployed People & Atlanta Fed Wage Growth

Source: Bloomberg, Bureau of Labor Statistics

Graph 6: US Quit Rate

Source: Bloomberg, Bureau of Labor Statistics

The labour market shows signs of cooling.

 

As 2023 progressed, signs of a cooling in the labour market emerged. Workers still had bargaining power in some industries due to labour shortages and skill mismatches. However, wage growth has slowed. The unemployment rate has increased off its low of 3.1% in April 2023 to 3.5% in December 2023 and quit rates have decreased. Job openings continue to decline from its peak to the 8.8 million openings reported in November 2023, albeit still elevated compared to history. The labour force participation rate continues to rise as previously hesitant individuals return to the workforce. Lastly, as businesses take a more cautious approach to hiring new staff due to concerns of a potential recession, the rate of job growth has slowed, with Nonfarm Payrolls showing an average of 225 000 new jobs per month in 2023, compared to 399 000 average monthly increase in 2022 (see graph 7 below).

Graph 7: US Nonfarm Payrolls: Monthly Change

Source: Bloomberg, Bureau of Labor Statistics

Conclusion.

 

In conclusion, from the above, the pace of growth has slowed, but job openings continue to exceed available workers, the unemployment rate remains low, and workers are getting a real increase in wages as inflation slows faster than wages.

The US labour market remains strong, but it is going through a period of digestion and cooling in a gradual manner from a very tight start at the beginning of the year. The labour market is also seen as a lagging indicator of economic activity, and this gradual normalisation shows that the monetary tightening of the Fed is working its way through the economy.

Disclaimer:

Fairtree Asset Management (Pty) Ltd is an authorised financial services provider (FSP 25917). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available upon request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Performance has been calculated using net NAV to NAV numbers with income reinvested. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information, such as fund prices.

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