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Employment Change: Are Workers Coming or Going?

Regional Matters
June 14, 2024

One of the most cited measures in the U.S. economy is the net number of jobs gained in a month. But that net gain (e.g., 272,000 jobs gained in May) reflects an enormous amount of churn in the labor market as millions of workers gain new jobs (new hires) and millions lose or leave their jobs (involuntary/voluntary separations) in any given month. At a micro level, if firms report a net job gain, they have either increased hiring or kept hiring steady and experienced a decrease in separations. If firms report that their net employment gains are attributed more to declines in separations than increases in hiring, that might foreshadow some softening in the labor market. In May, to better understand the current dynamics at the firm level, we asked Fifth District businesses about how their employment, hiring, and separations have changed in the last month. Among our surveyed firms, we find that although the dynamics in separations might be changing, it is hiring that matters most to employment change; respondent firms that are and expect to increase employment are also those that have high levels of hiring relative to what they might consider "normal."

Our Slowing Survey Measures of Employment

Both nationally and in the district, job gains have been strong in the last few years, but they have slowed somewhat.

Those slowing gains are reflected in our service sector and manufacturing employment indices, which have steadily declined since their peak in 2021 and have been hovering around zero since mid-2022. Because our survey measures are diffusion indices, zero indicates that approximately an equal number of firms expect employment to increase than expect it to decrease — implying relatively low net job gains. (Of course, a diffusion index only captures the extensive margin — how many firms are increasing or decreasing. Net job gains will also depend on the intensive margin — how much increasing firms are increasing and how much decreasing firms are decreasing — which our index does not capture.)

In any given month, most of our manufacturing and non-manufacturing survey participants report "no change" in employment levels at their firm. In the last few months, somewhere between 10-15 percent of firms reported that employment decreased, and 15 to 20 percent reported that employment increased. For those that reported an increase in employment — is it increased hiring or declining separations?

Is It Hiring or Separations?

Similar to employment, most firms reported "no change" in hiring and separations (voluntary or involuntary) when we asked this set of special questions in May. However, as the table below shows, firms were more likely to report an increase in hiring in the last month (25 percent of firms) than an increase in voluntary separations (14 percent of firms) or involuntary separations (19 percent of firms).

Compared to the previous month, hiring/the number of voluntary separations/the number of involuntary separations have...
IncreasedDecreasedNot changed
Voluntary separations14%12%75%
Involuntary separations19%4%77%
Source: Federal Reserve Bank of Richmond May business surveys. Not seasonally adjusted. N=216

Firms that reported an increase in employment, however, were much more likely to report an increase in hiring in May. More than 70 percent of firms that reported an employment increase also reported a hiring increase (compared to 15 percent of firms that reported no change or a decrease in employment.) More surprisingly, perhaps, is that firms with a net decline in employment were more likely to report a decrease in voluntary and involuntary separations. In other words, employment increases in May among respondent firms were driven more by hiring increases than by declines in separations.

Of course, May is only one month, and firm decision-making is dynamic. We also asked respondents for their hiring and voluntary separation levels relative to what they would consider "normal." Firms were most likely to report that voluntary separations and hiring were in line with historical norms: Almost 70 percent of firms reported that voluntary separations were in line with historical norms, and 65 percent reported that their pace of hiring was in line with historical norms. However, respondents were more likely to report that separations and hiring were low than high. Seventeen percent of respondents said voluntary separations were lower than normal (compared to 9 percent that said above normal), and 21 percent of respondents reported that hiring is below normal (compared to 9 percent that said above normal).

This varied significantly by whether a firm reported employment increase or decrease in May.

As might be expected, almost no firms that reported employment increase reported low hiring relative to normal, while over 70 percent of firms with decreased employment reported that hiring was low. Again, the dynamics in separations are unexpected: Firms with decreased employment were much more likely to report a low level of hiring and a high level of separations. In other words, firms that are increasing employment are hiring but also seeing less change — for the better or for the worse — in separations.

Current hiring and separations also affect employment expectations — and again, the prediction seems to lie in the hiring. Firms that report a high level of hiring are much more likely to report that they expect employment to increase in the next six months, but those that have a low level of separations are only slightly more likely to expect an increase in employment.

So, if employment changes rely on changes in hiring, what are firms doing to negotiate a labor market that is still tight? Many firms are, of course, backfilling open positions. But many more are finding other ways to get work done.

It is easy to think that firms reporting a decrease in employment see shrinking demand for their product or service, but as the population ages, labor force participation declines, and technology develops, many firms are turning to automation to continue to deliver for their customers. As new technology, such as generative artificial intelligence develops, there is one key labor market question: Is the technology labor-replacing or labor-augmenting? If history provides any insight, it will likely be some combination. Overall employment will not suffer, but individual occupations or industries could see notable change in their ratio of capital to labor.

Future Implications

Since the end of the pandemic, the U.S. labor market has been historically tight: incredibly strong job growth, high levels of postings, and a very low unemployment rate. As the employment growth moves to more normal territory, it will be important to understand where the growth is coming from. If firms are still hiring, that indicates a growing economy. But if workers become decreasingly willing to leave their jobs, that indicates an uncertainty about opportunities in the labor market and thus, a more uncertain economy. For now, most firms report that hiring is in line with normal, and increased hiring is driving the employment increase among most Fifth District respondent firms.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.