The cognoscenti may have been too quick to declare the end of the Great Resignation.
The latest Bureau of Labor Statistics data on Thursday showed that the number of workers voluntarily leaving their jobs surged in May by the most since November 2021. On a day of strong labor reports, it might be the most consequential for the fight against inflation. The BLS’s Job Openings and Labor Turnover Survey showed that quits rose by 250,000 to 4 million, about 2.6% of the labor force. Although that’s well below the 3% peak in 2021, it’s comfortably above the highest value recorded before the pandemic.
Quits, of course, are likely to get short shrift in a week filled with high-profile labor market data, but they may be among the most important. New data from the ADP Research Institute on Thursday showed that US companies added nearly half a million jobs in June, and Challenger, Gray & Christmas Inc. data showed job cuts fell to an eight-month low. But the US has experienced plenty of strong labor markets in the relatively recent past, and most of them haven’t meant much for inflation overall. What’s different now is the frequency with which workers are switching jobs, a phenomenon that has drastically increased worker bargaining power and fueled rising nominal compensation — a welcome development if you’re a worker bee but a minor nightmare if you’re a central banker operating under the logic that wages fuel inflation.
During the late 2010s, job-to-job churn was relatively low, which helped explain the era’s muted inflation despite low unemployment. But that changed abruptly in 2021 and 2022 when millions of Americans left their roles in a wave that shocked employers. In some cases, they left for lifestyle or health reasons, including efforts to avoid Covid-19 exposure. But in many other cases, they simply moved to a competitor in pursuit of a raise.
Demand in the US had recovered more quickly than the supply-constrained labor market could accommodate, and workers found that they could name their price in the open market. Even among those who didn’t jump ship, many still managed to use offer letters to earn higher pay from their employers. The quits rate, in that episode, proved a powerful indicator of workforce bargaining power above and beyond that implied by the basic unemployment rate.
No one’s predicting a return to that degree of job-to-job mobility, but the latest data suggest that a reversion to normalcy may take a bit longer than expected — just a month after some declared the retracement complete.
The influence of quits on inflation has become better understood in the past decade, but the Great Resignation brought it into stark relief. In 2015’s “ Job Switching and Wage Growth,” Federal Reserve Bank of Chicago economists Jason Faberman and Alejandro Justiano found that the quits rate was highly correlated with wage growth. More recently, though, another group of authors from the Dansmarks Nationalbank and Chicago Fed developed a comprehensive indicator of labor market slack that combined unemployment with job-to-job flows. They found that the Great Resignation increased overall inflation by about 1.1 percentage points. In a Chicago Fed Letter last year, authors Renato Faccini, Leonardo Melosi, and Russell Miles wrote the following (emphasis mine):
By applying for jobs in a different firm, employed workers can elicit wage competition between the current employer and the new candidate employer. The firm that intends to poach the worker from their current employer has to offer a sufficiently large wage to make the offer attractive. And if a worker is particularly valued by their own employer, they may be offered a pay raise that is necessary to retain them in their current job. In this context, if employed workers search more, wage competition among employers increases, leading to an increase in inflationary pressures...
Although the quits rate was stable in the Midwest and West, the latest report showed it climbed in the Northeast and South. Among industries, the rate rocketed higher in construction, where signs have emerged that residential activity may have recently bottomed.
Job vacancies, which were also disclosed in the BLS’s JOLTS report on Thursday, fell more than forecast to 9.8 million, a welcome sign for policymakers that leaves about 1.6 openings for every unemployed worker — the lowest since 2021 but still well above the ratio of 1.2 that prevailed before the pandemic.
But quits, I’d argue, is the more important of those metrics by a significant margin. If you run a company, you probably won’t change your compensation plans simply because a competitor posts a series of openings. If — on the other hand — the job openings go up and your own employees decamp, you’re likely to start paying attention. You’d certainly provide counteroffers to many of the existing employees, and you might consider off-cycle pay increases for others to head off future defections. The job postings matter, but intuitively, quits matter more.
Needless to say, the picture from the labor market data isn’t necessarily bad — especially if you’re a worker. Strength in US payrolls is likely to further delay — and maybe prevent — the recession that Wall Street has been expecting for the past year. Resilient income streams will sustain consumption in a virtuous cycle. The challenge, of course, comes down the road if wage pressure translates into stubbornly high core inflation, which prompts the Fed to keep policy tighter for longer. Many of us keep rooting for the best of both worlds — a so-called soft landing with a resilient real economy and receding inflation pressures — and the definitive end of the Great Resignation would certainly have helped. Ultimately, though, it looks as if the remnants of the strange pandemic labor market are likely to linger for a while.
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