Oregon Office of Economic Analysis

Strong job growth and employment prospects are vital to economic health. However there is a difference between a strong and tight labor market and an overheating labor market. Given wage growth is clearly outstripping productivity gains, it is inflationary today. A slowing in wage growth (and an increase in business investment and productivity) is needed for underlying inflation to return to the Fed’s target as wage growth provides households their baseline ability to spend.

Encouragingly the data, especially the Oregon data, does appear to be turning in such a way that a slowdown in the labor market and wage growth is not just possible, but likely. Let’s start first with job openings. In September there were 1.5 job openings in Oregon for every unemployed Oregonian looking for work. Clearly labor demand (number of jobs that firms are looking to fill) is outstripping labor supply (number of available workers) which ultimately leads to the faster wage growth.

Better labor market balance could come from relatively fewer job openings or a large increase in unemployment. The Federal Reserve’s outlook is the former. This is sometimes referred to as the Waller view, named after Fed Governor Christopher Waller. In a speech earlier in the pandemic, Mr. Waller outlined how there could be a decrease in job openings which brought better balance and slower wage growth and inflation without a sizable increase in unemployment. So far this is playing out at least a little bit. Back in March there were 1.9 job openings in Oregon for every unemployed Oregonian. More progress and better balance is needed, but movement in the right direction is still movement in the right direction.

A key labor market concept is the so-called Beveridge Curve which looks at the relationship between job openings and unemployment. Generally speaking, firms are looking to fill more positions in a strong economy, and it is harder to find workers at the same time because most individuals who want a job are able to find one. During the pandemic this relationship has broadly held up as before, however what is potentially concerning is it appears to have shifted up, or shifted out as seen in the light blue dots when compared to the gray dots. What this would indicate is that for any given level of job openings, there will be higher unemployment in the economy than there was before the pandemic. One possibility is that this is a timing issue, or something the pandemic temporarily disrupted. Another possibility is something is fundamentally broken in the economy, or that the natural rate of unemployment has increased.

Encouragingly, the data so far this year in Oregon (dark blue dots) has brought the Beveridge curve about halfway back to the pre-pandemic patterns. This is exactly the Waller view in that job openings are declining and unemployment is not increasing. The U.S. data so far in 2022 shows less progress than does the Oregon data, although it has moved in the same direction. This morning’s national JOLTS release shows another step in the direction of better balance as well.

More encouraging is that labor matching in the economy – the speed at which unemployed workers are able to find a job, and firms looking to hire are able to do so – does not appear to be permanently broken in recent years.

The nearby chart looks at the job finding rate in the economy based on how many job openings and unemployed workers there are. It compares the actual job finding rate with the expected rate based on historical patterns. There was a clear breakdown earlier in the pandemic. This was likely due to the shutdowns, the virus itself, lack of in-person schooling and childcare, and federal aid including enhanced unemployment insurance benefits, however the data in recent months is now nearly back to the expected patterns as seen in 2019. This is a stepdown in labor matching or efficiency relative to earlier last decade, but so far the 2022 numbers look pretty similar to the 2018 or 2019 numbers. We can argue about it still being slightly lower, but broadly speaking it’s getting back to the same relative patterns.

This job matching work is based on a 2020 Fed paper from Ahn and Crane, which was updated more recently by the San Francisco Fed discussing the current state of the economy. Our office created an Oregon version to better gauge the local labor market.

Finally, new Fed research from Cheremukhin and Restrepo-Echavarria helps shed light on some of the changes in job openings and the economy in recent years. As the authors detail, when businesses hire workers they are either hiring someone who is unemployed and looking for work, or they are hiring a worker away from another firm, or poaching – a term the authors use. These are different segments to the labor market and have different impacts on job openings, wage growth, the unemployment rate and so on.

What the authors find nationally, and our office has recreated using Oregon data, is that the surge in job openings in recent years is due to more poaching. This has a few implications. First it means that the labor matching process, as discussed above, is not broken and unemployed workers are able to find jobs. Second, workers who switch jobs tend to see larger wage gains than those that stay at their jobs. As such, the higher rate of workforce turnover during the pandemic, including the higher rate of worker quits today as workers switch jobs, helps lead to both faster overall wage gains and inflationary pressures, and firms to advertise more openings to fill their newly vacant positions as workers leave for other opportunities. This is a distinct process from the possibility that unemployment is more structural in that the workers lack the skills needed for the available jobs, or that there is a geographic mismatch between openings and the unemployed, etc.

The decline in job openings so far this year, both nationally and here in Oregon, is coming from the poaching component and not the unemployed portion. This is encouraging that unemployed workers are still able to find jobs quickly, and that overall workforce churn may be slowing as well. As discussed in previous forecasts our office has hoped that the higher rate of worker quits, and job switching would lead to an overall better labor match. This could be in terms of skillset, geographic location and hours worked. At a minimum job switching typically is at least for higher pay. These temporary changes in the labor market, moving from one job to another, can be disruptive from a productivity standpoint. After a period of training or getting acquainted at a new place of work, the expectation is productivity will pick back up. A cooling in the labor market, where more workers are in better financial and workplace positions could be beneficial for the overall economy.