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Speaking of the Economy
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Speaking of the Economy
Jan. 4, 2023

Navigating Tight Labor Markets

Audience: General Public

Claudia Macaluso and Sonya Ravindranath Waddell discuss recent challenges in finding and retaining workers, and how businesses have changed their recruitment tactics, adjusted wages, and made other changes in response to these challenges. Macaluso is an economist and Waddell is a vice president and economist at the Federal Reserve Bank of Richmond.



Tim Sablik: Hello, I'm Tim Sablik, a senior economics writer at the Richmond Fed. Joining me today are Claudia Macaluso, an economist at the Richmond Fed, and Sonya Waddell, a vice president and economist who also manages the Regional and Community Analysis team. Claudia and Sonya, welcome to the show.

Claudia Macaluso: It's our pleasure. Thanks, Tim.

Sonya Waddell: Thanks for having us, Tim.

Sablik: Today, I want to talk with both of you about what has been happening in the labor market, focusing specifically on the employer side of things. One of the big stories of 2022 was that many employers were having a tough time hiring and retaining workers. The unemployment rate fell from a record high at the outset of COVID-19 in March and April of 2020 to near record lows by the spring of 2022. Job openings were also at a record high, with roughly two job postings for every job seeker.

My first question: Is the labor market still really tight as we head into the new year?

Macaluso: Tim, I think the short answer is yes. As much as the Fed has been taking action, the labor market seems to be really strong.

I know there has been news of layoffs that are concentrated in some sectors. We've all heard about the layoffs at some big tech companies. I still think that those are more the exception to the rule than the actual rule, and I'm not sure they will be something like a bellwether. I'm thinking of other sectors that are much larger like manufacturing, construction, hospitality. Hospitality together with restaurants is about 10 percent of the U.S. workforce. Those sectors are adding jobs at a pretty brisk pace.

We also have seen the staffing industry, which is more about the lower educated section of the labor market. That's cooling down, but it's still much higher than pre-pandemic, for example, or still much higher with respect to last year. So, there's definitely a lot of jobs being created there.

The unemployment benefits claims are a little bit higher than the beginning of the year. But there are still at historic lows since at least the 2010s.

Waddell: Yeah, everything that Claudia said is completely consistent with what we've heard for months from our survey respondents and consistent with a labor market that's still tight.

Back in June, we had another iteration of our survey of employer recruiting behavior, where we collaborated with the Richmond chapter of the Society for [Human Resource] Management, or SHRM, to survey a group of HR professionals and recruiting managers. We found very similar job openings and hires rates to what we see at the national level. We also found that the effort recruiters have had to expend to get somebody into an open job has continued to increase in the last year. Both recruiters and hiring managers are having to engage new techniques to attract and hire new workers.

Although we didn't ask questions particular to recruiting in the fourth quarter release of the CFO Survey which just came out, we did ask about annual wage adjustments. We found that even those employers who report not making cost of living or inflation adjustments to their annual compensation report a higher wage increase this year than what they would provide in, say, a normal year. What's more, those respondents have not, on average, reported declines in their projections for employment growth in 2023, even as their projections for revenue growth have fallen as has their optimism about the U.S. economy and their own firm prospects.

Finally, in the October Fifth District business survey, we asked specifically about hiring and results were in line with what we've seen in the national data. Firms are not looking to increase their workforce the way that they were in 2021 in the first part of this year, but they are still anticipating hiring in line with what they expected in, say, 2019. The two most important factors behind these hiring plans were that the expected sales growth is high and that the current staff are overworked.

All of these survey results indicate that even if labor markets are not quite as tight as they were a year ago, they're still rather tight from the perspective of employers.

Sablik: Both from the national data and our survey data, [there is] plenty of evidence that the labor market is still quite tight. From the perspective of employers, then, what seems to be the biggest hurdles to finding workers?

Macaluso: That's a really good question, and it's something that we surveyed businesses about very explicitly.

First, though, I want to point out that it's not just hurdles in finding workers. It's been hurdles also in retaining your current employees. These two things go hand in hand because the higher the turnover rate, the more of your employees are quitting and the more you'll need to hire. It's sort of a vicious cycle, or a virtuous circle depending on [how] you want to look at it. All of the steps of recruiting, screening, and hiring are subject to these turnover challenges.

Something that we have seen that [is] particularly interesting, for example, is that some employers report so-called "ghosting" by prospective employees. The candidates quite simply disappear. This phenomenon that we thought of as just on social media, it's actually happening also in the labor market, especially at the lower education end.

This is important because it points out how recruiting and hiring is not just a one-step process, but instead, there's quite a few phases of it. All of them can be smooth or less smooth, and they've been less smooth lately.

I also want to point out that we talk a lot about wages and wage growth. But compensation as a whole has become much more than just your wage. That's where, for example, flexibility of hours or even offering location options for remote or hybrid work have become really important as a tool to find workers and retain your existing employees.

Waddell: I'll just add that in the survey of employee recruiting behavior, we found only a small percentage of respondents said that it was easier or easy at all to hire workers. Even that was really focused on the higher skilled workers or workers that perform these non-routine or creative tasks, usually college educated or highly trained. All of our responding firms across surveys report continued challenges hiring mid- and lower-skilled workers.

Sablik: Right. I definitely want to ask some questions about the retaining side of things. But sticking with hiring workers for now, what have employers tried to do to improve their chances of filling jobs?

Waddell: I'll take that one first and then turn it over to Claudia.

The most common response in, again, this survey of employee recruiting behavior was that firms are increasing wages at a faster pace than the prior year. As I said earlier, this is consistent with what we have found in other surveys, like the CFO Survey and the Fifth District business surveys.

In our Fifth District surveys, the share of firms who report increasing wages climbed through 2021 and 2022 and has now been at a record level for months. This is, of course, nominal wages. In the last 18 months, inflation has been taking a bite out of those wage increases for workers. But I know that's a topic for another one of your shows.

Beyond wage increases, our surveys indicate that the best methods to improve job filling can depend on the type of worker that firms are trying to recruit.

Macaluso: I think this is really where things get interesting. We have remarkably little evidence on what exactly employers do to attract applicants and to screen those applicants and then prepare a contract and hire.

Broadly, we've seen two things in the data, both our own survey and other surveys. The first one is employers have expanded the pool of applicants. This can mean, for example, lowering the expected qualifications. This is something that we had seen before during the Great Recession of 2007-2009, for example. Think of Delta not asking for a college degree for its pilot trainees, for example.

As I mentioned before, expanding the pool is also thinking of workers who may need a little more flexibility [and] giving them a flexible schedule, remote options. That has also resulted in expanding the geographic reach of recruiting. This is something I'm particularly interested in. It's something that we saw very explicitly in our data – the employers who report offering remote options are precisely those who also are looking beyond their own city, their own country, their own state, sometimes just nationwide for the applicants.

Something else that we have seen in our survey that was not known before, at least with this level of detail, is that firms employ a variety of methods to recruit. There's a variety of channels: social media is a big one, recommendations and referrals are very, very important. Perhaps most importantly, firms tend to use all of these methods together. Especially in the last few months, we've seen an increase in this, I want to call it "all hands on deck" kind of approach. We're using all these methods, together with some kind of fine tuning and targeting of positions.

Sablik: Turning back to the case of worker retention, 2022 also saw a surge in the rate at which workers quit their jobs to take advantage of new opportunities. It sounds like from what you were saying, Claudia, that's still an issue for employers. How are they responding to that particular challenge?

Macaluso: You're right. This is still a challenge, perhaps the challenge. As Sonya was saying, firms are seeing a slowing in the pace of hiring but definitely not a slowing in the pace of quitting. So, to some extent, that's really where the crux of the matter is.

I think of the challenges [of retaining employees] as being related and very similar to [the challenges of] hiring. We've seen employers offering more remote options, more flexible options. Some of the same instruments that you would use for hiring you can use for retaining. An example is the signing bonuses. You might think of them as chiefly a way to hire, to entice people to apply and start working with you. But because most of them have to be returned if the person doesn't stay at least 12 months, they have this double function.

Waddell: That is completely consistent with what we hear across our surveys, as Claudia knows. When we've asked firms what approaches they take to the challenges [of] hiring workers, they'll respond that one very important approach is just trying to retain and promote existing employees.

I didn't mention this before, but many employers also report hiring less qualified workers but providing training to upgrade their skills. This is used as both a recruitment and retention mechanism. Of course, firms are also reporting increases in wages and salaries for most of their existing employees more than they have in the past few years.

Sablik: I think the next big question is, do you think that these changes from the pandemic will have a lasting impact on how employers recruit workers? Claudia, maybe we can start with you.

Macaluso: Sure. This is the million-dollar question, right? Do I have the crystal ball [saying] is it going to happen? I'm going to venture out on a limb here and I want to say yes. I think this is a true technological shift that we are witnessing, and that's very interesting.

Why do I think that? I honestly think we have good indications that remote work is here to stay –especially for the college educated [and] the higher wage workers and jobs – if anything because we have seen it stick around after most of the restrictions that were imposed by the government were lifted. I also think there's good evidence that many workers still harbor safety concerns, cleanliness concerns, distance concerns. Even though the COVID threat might have subsided, we do see workers being aware of sicknesses in the workplace much more than before and desiring that distance.

I think another change that's more on the technological side is how pervasive the online tools have become. We've all been on Zoom more than we possibly should have. This is true also for recruitment, for screening candidates, for interviewing, for applying [and] in fact, sometimes even just for working. So, I think that's just going to be a feature of the labor market in the future.

It could be a good thing or a bad thing. Of course, that's a little harder to assess. There's a concern that we may make people less productive – we are no longer all in the office exchanging ideas and that's going to make us just a little less smart. There's also concern that this may make matching itself less productive. Perhaps there was something to those face-to-face interviews, and now we're missing out on them and getting worse matches.

On the other hand, though, as we were pointing out before, this has really expanded the access both for firms to workers and for workers to jobs. If you're thinking of people in rural areas or women, for example, who have been penalized historically by their need for flexibility during childbearing years, this is an opportunity to get these people into the labor market in a more permanent fashion and to get them good jobs potentially.

Sablik: What would you both be watching in the labor market for next year in 2023? Are you working on any research projects related to this topic that you can share?

Waddell: A rising share of firms that respond to our surveys expect slower demand for their goods and services in 2023. So, one of the key things that we're looking for is evidence, first, that this slower demand plays out and, second, that firms respond to that slower demand by either reducing their expectations for employment growth – so they see fewer employees added – or planning layoffs of existing workers. Thus far, while we have some evidence that firms have reduced the number of postings, many of our contacts report that they will hold on to employees as long as possible given how difficult it's been to hire and retain employees in the last two years.

Right now, firms are more likely to report either wanting to hang on to workers, even with a decline in demand, or reducing headcount simply by not replacing workers who leave. But if demand for their products or services really starts to drop, of course, we could see that change.

We're also looking for ways to more regularly gauge recruiting practices – we've really enjoyed our collaboration with the Richmond chapter of SHRM and would love to do more of that in the future. Even if postings do fall, an elevated level of recruiting intensity could indicate a labor market that's still relatively tight. On the other hand, if we see a broad-based decline in recruiting intensity, that could mean something different for the state of the labor market.

Macaluso: Yeah, I completely agree. We're all sort of waiting for how the dynamics will play out. We'll definitely look forward to [doing] some more surveying of the employers.

I personally will also be looking out for what happens to labor force participation. There [are] about 5 million workers still missing to some extent from the labor force. Part of that could be long COVID – if you sort of take a rough estimate, that will be consistent. Part of it could be that balance sheets have been historically strong, especially for poorer families.

I will still be looking into what happens to recruiting methods [and] recruiting efforts in real time. We will have a new project looking specifically at the hourly labor market. These are workers typically without a college education.

I'm also really interested in seeing how these differences, these changes in the technology of recruiting and hiring will play out for different demographics. I am thinking here of workers of different races, workers of different genders. How would this translate into their wage growth and into their mobility across jobs and employers going forward?

Sablik: Yeah, lots to focus on and keep an eye on. Claudia and Sonya, thanks so much for joining me today to unpack some of these issues.

Macaluso: Thank you, Tim. It's been really great.

Waddell: Yes, thanks so much, Tim.