How the pandemic has made it difficult for firms to retain workers
Job quits have always been an important indicator of the state of the macroeconomy. As people quit their jobs and begin searching for new positions, uncertainty abounds. In bad economic times, people hang on tight to their job, knowing it will be hard to find a role in other firms due to the low number of vacancies being posted. On the other hand, when the economy is booming, workers are confident enough to quit jobs that are not right for them and look for better opportunities.
Workers’ confidence is thus an important indicator, as it reflects the labour force’s expectations and feelings about the difficulty of finding a job and hence the health of the labour market. Quitting not only reflects the status of the labour market but also affects it. As more workers quit to find more suitable jobs, pre-existing unfit relationships are ended to make space for newer and healthier employee-employer relationships that will benefit the economy in the long run.
Hence the old saying “winners never quit” is not valid for the labour market, as a thriving labour market is one that actually has a large amount of quits. In this regard, today’s data is very encouraging. The United States Bureau of Labour Statistics (BLS) in its last Job Openings and Labour Turnover Survey of September, reported that job quits are at 3%, the highest level seen since the statistic started to be collected in December 2000. Furthermore, it can be observed that quits correlate quite well with unemployment, and we think that more quits are on the horizon.
It is visible that when unemployment rises, workers are less confident in the economy and their job quit rate quickly declines. Quits are lagging as the BLS takes a bit longer to collect data from the Labour Turnover Survey compared to the unemployment filings. For example, the most recent data point represents September 2021, while unemployment has already been measured for the month of October. We expect that for the month of October, as well as for future months, quits will be even higher as unemployment reverses back to pre-pandemic levels of 3-4%.
A fundamental question remains though: why are quits happening?
While we can only speculate on the cause driving these decisions, it is fair to think that the pandemic period has had a large impact on today’s labour market and its high levels of resignations. Actually, the effect has been so remarkable that economists are calling this post-lockdown period as “The Great Resignation”, a term first coined by Texas A&M Professor Anthony Klotz, who predicted in May 2020 this mass exodus would be coming.
First of all, by looking at sectors, we can find out more on where most of the quits are coming from. September data from the BLS shows that the sector with the highest resignation was Leisure and Hospitality. With more than 6 in 100 workers quitting their jobs, this sector has had not only the largest quit rate in the economy as of September, but also the highest pre to post pandemic change. One possible driver of this phenomenon is that in the tourism industry, where in-person interaction is required, workers have more difficulty enjoying the heightened life-work balance that has come from working from home. The same issue goes for the trade, transportation and utilities sector which includes, among others, employees working in retail stores and warehouses that cannot work from home. Overall then, it is fair to speculate that the desire for flexibility and the possibility of remote working has led some individuals to rethink their career choices.
A second reason to consider is that some of these quits may be the result of more than a year of pent-up resignations. Employees considering leaving their jobs during the worst months of the health emergency may have delayed their decisions due to the financial uncertainty brought by the pandemic, but now, with the return of demand for their work, they feel confident enough to quit.
Some workers, instead, encountered more demand for their services during the pandemic than usual. This is the case of healthcare and social assistance workers. They have been such a key factor in fighting COVID-19 that many of them, having to deal with a disproportionate number of patients, have experienced burnout early on. In fact, their quit rates were already at record-highs in July 2020, only three months since the beginning of the outbreak, and have since been continuing to increase to reach a worrying 2.9% level in September. A recent longitudinal poll conducted by Morning Consult tracked over 1000 healthcare workers and found that, as of September 2021, 18% of them had left their job since February 2020 and about 20% of those who stayed are considering leaving the healthcare industry altogether in the near future.
Finally, another interesting factor to observe is the age composition of those who are resigning. While turnover for younger workers is usually higher, an in-depth report by Visier, a leader in people’s analytics, analyzed more than 9 million employee records to conclude that resignations are mostly occurring within mid-career professionals, aged 30 to 45. One possible hypothesis for this is that the shift to remote work has made employers favor more experienced workers at the expense of entry-level individuals which may require in-person training. The rise in demand for mid-career professionals has made it easier for them to secure new job positions and quit their existing jobs.
What are the consequences of this mass exodus?
As workers leave behind vacant positions, and unemployment goes back to pre-pandemic levels, labour markets are becoming increasingly tight. This means that there is very little room for firms to find suitable workers to fill the abundance of vacancies left in the economy. In fact, the most recent BLS data shows that with only 0.73 unemployed people per job opening, it has never been this hard for firms to hire, or equivalently the labour market has never been so tight.
A s economic theory and intuition suggest, we expect that, as firms keep facing an increasingly harder time recruiting from the unemployed and retaining employees, they will need to increase wages and wage growth will keep being higher than usual. Historically, it has been the case that job switchers have higher wage growth levels than individuals who hold their job, hence we expect that as more people quit their jobs to find new opportunities, total wage growth will become skewed towards the higher job-switcher wage growth.
Compared to the past, other than wages, firms will also need to increase employee benefits and allow for more work-life balance and flexibility in order to retain talent. This is pretty great news for those who are looking for a job.
But how long will this last?
While some might argue that the increase in wages will bring an influx of workers back into the labour force, whose participation rate has yet to return to pre-pandemic levels, thereby reducing the acquired job-seekers leverage in negotiating compensation, there are many reasons to believe that wage growth will not be temporary.
This is because even the most recent surveys on workers’ intentions, such as the Bankrate August 2021 Job Seeker Survey, keep showing that a large proportion of workers are likely to switch their job in the next six months.
More importantly though, the reason why wage growth is here to stay is that the Great Resignation ties into bigger demographic trends that were already ongoing before the pandemic hit. In particular, the United States population is ageing. The dependency ratio, namely the ratio of those not likely to be in the labour force (<15 years old and 65+), i.e. the dependent part of the population, to the working-age population, has been hedging higher since the early 2000s. While in 2005 there were only eighteen dependents for every one-hundred workers, as of 2020 those same one-hundred workers are supporting twenty-five dependents. This process has increased the financial pressure on the productive part of the population calling for higher wage growth for years now and will continue to do so as baby-boomers retire en masse. In fact as people retire they do not contribute to the real economy but still spend, leading to inflationary pressures that require the working age population to negotiate higher nominal wages. Moreover, with fewer workers supporting more dependents, labour shortages will become more common in the economy and lead to persistent wage increases.
The Great Resignation is likely to bring even more quits as unemployment stabilizes towards pre-pandemic levels. The desire for higher work flexibility, burnout and accumulation of previous quits may be the factors driving this mass exodus that has given firms a hard time to recruit and retain talent. With the negotiating power flowing to employees, firms will need to increase wages and meet workers demands to fill open positions. Wage growth will continue even after the economy goes back to equilibrium, as the ageing population will lead to more common labor shortages.