Laid Off? Even Better

Wage levels that are no longer acceptable

In the aftermath of the 2008 financial crisis, the federal government failed to offset the market collapse with sufficient stimulus.

The chart above shows how depressed hiring was in 2008. Hiring then was less than half the level seen right after 2020, when hiring had plunged because of COVID.

An environment with very few job openings naturally led to a climate where low wages and poor benefits were tolerated.

As time passed and the economy recovered from the damage, consumer demand strengthened. That created an environment where companies could earn higher margins. At the same time, the unemployment rate was steadily falling.

An environment that allows companies to earn high margins means firms are making good money, and a lower unemployment rate means there are fewer additional workers available to hire.

So companies are raking in profits, and my own value as a worker has gone up, yet they say they can’t pay me more?

Workers who fail to secure higher pay at the bargaining table will quietly prepare to switch jobs or join a union.

We now know that workers were seeking higher pay than before.

Before long, an opportunity came along that allowed them to look for jobs that paid more.

The COVID-19 pandemic.

After the pandemic, an enormous number of people lost their jobs, and now the unemployment rate has fallen again. On the surface it looks as if the unemployed have simply gone back to where they were, but that is only half true.

Those who lost their jobs were looking for positions that paid higher wages. Countless companies still needed to hire roughly the same number of workers as before, so there were likely more job postings than usual. Job seekers, wanting higher pay, would have applied to the many openings starting with those that offered the highest wages.

Looking at the industries whose employment levels each account for more than 10% of total employment—Private Education and Health Services, Professional and Business Services, Leisure and Hospitality, Retail Trade, and Manufacturing (the industries within the red dotted box)—

Compared with January 2020, right before the unemployment rate spiked due to the pandemic, we can see that labor has flowed into Professional and Business Services, which offers the highest wage levels among them.

*The spread of remote work in office jobs appears to have played a role as well.

As discussed in the earlier column “If big companies are restructuring, why is unemployment at rock bottom?”, when we compare wage levels, Professional and Business Services is the only one among these five industries where wages are above the overall average.

The Bureau of Labor Statistics tracks employment by sector but offers very little visibility into worker movements or motivations, so it is not entirely clear whether low-wage workers have moved into higher-paying industries.

But many news reports support this view:

This dynamic led to what we previously described as “unnecessary hiring” of white-collar workers. Now, office jobs are seeing waves of layoffs, while industries like leisure and hospitality and retail are struggling with severe labor shortages.

Wages do not rise and fall just because the boss says so.

Once wages go up, it is very difficult for them to come back down.

That is why the pace of wage growth is determined by the supply and demand for labor.

Let’s take a look at how wages are set:

If there are more job openings (an increase in labor demand)

or fewer people who want to work (a decrease in labor supply)

the rate of wage growth rises,

If there are fewer job openings (a decrease in labor demand)

or more people who want to work (an increase in labor supply)

the rate of wage growth falls.

Even though wage growth has recently slowed,

it is still true that the current rate of wage growth is very high.

This means there are many companies looking to hire, but relatively few people who want to work.

Recalling what we observed earlier, we can infer that sectors other than white-collar office jobs are driving this trend.

The fact that wages are not easily brought down is a source of fear for the Fed.

Because it makes inflation stickier.

In Chair Powell’s November 30, 2022 speech on the labor market, he used the following language.

*Three categories: core goods inflation, housing services inflation, and inflation in core services other than housing.

In other words, core services inflation excluding housing makes up the largest share of PCE inflation,

and wages, which are the largest cost component in core services excluding housing, are crucial.

Powell then went on to express concern that the rate of nominal wage growth had risen to a level far above what would be consistent with 2 percent inflation.

When workers’ nominal wages rise, companies’ costs increase, which pushes up product prices, feeds into higher inflation, raises inflation expectations, and in turn drives nominal wages higher again, potentially trapping the economy in a wage–price spiral.

Put differently, as long as nominal wages do not keep rising, Powell’s hopes for a soft landing increase significantly.

Sectors other than white-collar office work are suffering from labor shortages (that is, they need more workers),

and these sectors facing labor shortages have been driving wage growth.

In other words, if labor flows into these sectors, wage growth should gradually slow, and expectations for Powell’s soft-landing scenario can grow even stronger.

And for labor to be supplied, the surplus white-collar workforce has to come back onto the market. That’s what all these layoffs at companies large and small are about.

Three-line summary:

1. White-collar workers are being laid off, while sectors like leisure, hospitality, and retail are struggling to hire.

2. This is a phenomenon that emerged through the pandemic, and the hiring shortage has pushed wage growth higher.

3. Labor needs to shift from white-collar jobs to sectors facing hiring shortages, so there is a positive side to the wave of layoffs at many companies.