June Job Openings and Labor Turnover

KEY DATA: Openings: -108,000; Hires: +117,000; Quits: +18,000

IN A NUTSHELL: “Hiring is improving and that is cutting into job openings.

WHAT IT MEANS: The JOLTS report is one of the most closely watched releases that we get each month as it provides insights into the availability of positions and the willingness of firms to fill those openings. In June, firms picked up the pace of hiring, which is good news. Indeed, there was a 7.4% rise over the year, which is robust. That pace was rarely seen in the last expansion and is a clear indication the labor market is solid. With payroll gains improving, the number of job openings eased. Smoothing the monthly ups and downs out, though, the second quarter level of job openings remained at record highs. Firms may be eating into their open job requisitions a little, but they have a long way to go. The one negative in the report was the modest rise in the number of people quitting. The level remains well below what we saw in the 2000s and we will not be able to say that the labor market is in good shape until people feel comfortable to simply tell their employers to take their jobs and you know what. We are not there yet.

MARKETS AND FED POLICY IMPLICATIONS: The labor market is in very good shape. Yes, the monthly job gains have been less than they were last year but they are still strong enough to keep the unemployment rate coming down. The JOLTS data raise some questions about the monthly job gain slowdown. Is it due to a moderation in demand or supply? Think about the housing market. Few debate the idea that a dearth of inventory is keeping home sales depressed. If you cannot find the right home, you don’t buy. But when you do find it, you have to pay the price or risk losing the home. Well, why don’t people think the same thing should be going on in the labor market? The low unemployment rate is making it difficult to dip into the shrinking “reserve army of the unemployed and underemployed”. But just like homebuyers who refuse to pay more for the home they like – and thus lose the homes – employers who refuse to pay up for workers are not getting the workers they need. Very simply, firms are behaving as if there isn’t a labor supply curve, just a labor demand curve. If you keep wages below the market-clearing wage by refusing to increase compensation, in a growing economy, demand will exceed supply. That is precisely what is going on in the labor market right now. Firms say they cannot find qualified workers but they will not pay up to attract qualified workers. The result: Slower job gains and modest wage increases. Interestingly – and in contrast to traditional economic thinking – higher wages could induce workers who are skilled and willing to move, to actually move! That would allow for a more dynamic labor market where people move up the ladder, creating openings for people at all skill levels. In other words, if wages increase faster, job gains could accelerate! Extending this logic to the housing market, higher home prices could induce more homeowners to list their homes, especially those with minimal equity, expanding inventory and increasing sales. When it comes to markets, if you don’t think about both supply and demand, you don’t get the analysis right.