If Big Corporations Are Restructuring, Why Is Unemployment at Rock Bottom?

From restaurants and cafes to news outlets and online media, warnings about an economic downturn keep coming.

Corporate leaders are worried about a recession as well. Google, Microsoft, Amazon, Meta...

Household-name giants have been rolling out one restructuring announcement after another, as if they too are bracing for a downturn.

Yet the broader employment data are telling a somewhat different story.

The U.S. unemployment rate of 3.5%—the lowest since the 1960s—illustrates this clearly.

- Julia Coronado, President of NABE

In the January 2023 Business Conditions Survey by NABE (National Association for Business Economics),

for the first time since 2020, more respondents said that their company’s employment is likely to decrease rather than increase going forward, and more than half expected a recession.

This is quite a shift from the situation at the end of 2022.

From October to December 2022, most firms represented by NABE survey respondents had raised wages and added staff.

Not long ago, the news was full of stories about layoffs, and many companies did in fact report shrinking profit margins,

so where exactly is all this hiring coming from?

In “The U.S. Unemployment Rate at Its Lowest Since the 1960s: What We Need to Pay Attention To,” we looked at hiring and turnover in the leisure and hospitality sector and linked them to rising wages.

This time, we will dig a bit deeper.

When we break down unemployment rates by industry, some sectors stand out with sharp year-over-year declines.

Mining, quarrying, and oil and gas extraction -3.90%

Information -2.50%

Leisure and hospitality -1.30%

Here, in the case of mining and information services, the number of unemployed people differs by more than a factor of eight compared with leisure and hospitality,

so if we first exclude the industries where unemployment has increased and then look at the year-over-year decline in the number of unemployed as of December 2022, it looks like this:

We have now narrowed down the industries that pulled down the overall unemployment rate.

Leisure and hospitality (167,000 fewer unemployed year over year)

Manufacturing (164,000 fewer unemployed year over year)

Wholesale and retail trade (155,000 fewer unemployed year over year)

These three industries alone account for as much as 57% of the decline in the overall unemployment rate over the past year.

Global corporate giants are making headlines for laying off employees, so where are these industries finding the money to keep hiring?

The data show that companies did not fire workers and then rehire them; rather, it comes down to people who quit to change jobs successfully landing new positions.

According to the job site Indeed, turnover rates by industry are higher the lower the wage level.

In fact, wages in leisure and hospitality, manufacturing, and retail are all lower than the overall industry average on both an hourly and weekly basis, and even fall below the median.

From here, we can hypothesize that wages rose sharply and workers moved to where the pay was better.

As of December 2021, the industries with the highest unemployment rates were

coal, oil and natural gas mining, construction, wholesale and retail trade, information services, and leisure and hospitality,

and by December 2022, their year-over-year wage growth, based on average hourly and weekly pay, was

6.3% for coal, oil and natural gas mining; 4.9% for construction; 3.9% for wholesale; 1.9% for retail; 5.6% for information services; and 4.8% for leisure and hospitality,

with all but wholesale and retail showing increases that far exceeded the 4.1% average wage growth across the remaining industries.

Of course, it is hard to explain everything with just two facts: low wage levels and high wage growth.

However, once we also look at the recent trend in unemployment insurance, which started to decline much earlier than the unemployment rate, the picture becomes more convincing.

Unemployment insurance can be claimed when a minimum-wage worker is laid off for reasons beyond their control.

There were 227,000 claims in December 2021 and 206,000 in December 2022, not a dramatic difference.

By contrast, the unemployed are people who have engaged in job search activities, such as submitting applications, but are currently without a job.

If we think back to the hiring difficulties that persisted at least through August, certain pieces start to fall into place.

When we picture these people, we might first imagine discouraged job seekers repeatedly rejected in the application process, struggling through a tough labor market.

But we can also think of applicants who, in pursuit of higher pay, are targeting companies that are a stretch relative to their current skill set; they are still, after all, unemployed people who are submitting job applications.

Unemployment benefits stayed the same, and only the unemployment rate went down.

These were people who quit their jobs to move to better positions, not people who were laid off. As more companies started to offer better benefits, they were able to find roles that suited them.

At the peak of the labor shortage, it was common to see companies removing degree requirements, offering benefits to part-time workers, and raising wages to attract new hires.

Walmart, for instance, decided at the time to pay bonuses to employees who stayed instead of leaving for other jobs.

From a corporate perspective, there was real concern about employee turnover. Losing these higher-quality applicants to competitors meant a sharp drop in hiring opportunities.

Next, the United States breaks down unemployment into six categories.

From U-1 to U-6, the definition of unemployment becomes progressively broader.

*Discouraged workers: Workers who have looked for a job at some point in the past 12 months but have not searched in the last four weeks because they believe no jobs are available for them

*Involuntary part-time workers: Workers who want and are available for full-time work but, for economic or other reasons, are working part-time

If we chart the data starting from the onset of the COVID-19 pandemic, we get the following picture.

Naturally, these are all unemployment rates, so the overall trend is similar; only the scope of the definition widens. But comparing each series reveals some interesting patterns.

U-2 is U-1 plus those who have just completed temporary jobs.

U-4 is U-3 plus discouraged workers,

and U-6 is U-5 plus involuntary part-time workers.

Using this, we can isolate only those who have completed temporary jobs, discouraged workers, and involuntary part-time workers.

Throughout 2022, these indicators moved in a similar fashion.

There weren’t particularly many temporary positions within firms, nor were companies in such poor shape that they hired only part-timers,

and it was not the case that unemployed workers had simply stopped looking for jobs.

On paper they showed up as unemployed, but in reality they were job changers who had just found positions that met their wage expectations.

Now the flowchart is starting to take shape in our minds.

It is not that the labor market is robust even as large corporations are restructuring,

but rather that just as people who wanted higher wages are finally satisfied and starting to join firms,

large corporations, whose sizable workforces make them sensitive to the business cycle, may be only just beginning their layoffs.

Judging by labor-market data alone, conditions have normalized to a degree that makes investors’ earlier worries look almost misplaced.

However, the interpretation can change dramatically depending on the sequence in which you look at these data.

Of course, the labor market data are undeniably strong, so I also think there is an upside risk in this environment.

If CPI normalizes, rates stop rising, and supply chains continue to ease without disruption, today’s labor market data will be an unambiguous positive.

Let’s hope that workers who switched jobs for higher pay do not end up reigniting inflation.

*Upside risk: The risk of missing out on potential returns from not holding stocks if conditions turn more favorable than expected.

Three-line summary:

1. Strong employment data reflect workers settling into better-matched jobs after a period of severe labor shortages.

2. It may not be that employment data are strong despite ongoing layoffs, but rather that layoffs began while the labor data were still strong.

3. There is also upside risk; we should keep an eye on inflation pressures stemming from job switchers.