Labor Markets Continue to Run Hot
The labor market outlook continues to defy gravity. In our last issue, we shared how national and state labor markets generally outperformed expectations. We also discussed historic data revisions that indicated labor markets were healthier in the post-pandemic years than originally thought. Looking out today, the story continues to be strong employment growth, low unemployment, and tight labor market conditions.
South Dakota’s employment growth has outpaced the US during the first two quarters of 2023, but the gap has narrowed as employment growth slows. We anticipate national employment growth will surpass the states during the second half of the year, with both the state and nation ending the year with an average 2.4% employment growth year-over-year.
Two headwinds at the national level are contributing to slower employment growth. First, the FED has strongly signaled it’s not done raising interest rates. Every increase puts more pressure on Aggregate Demand — the sum total of all final demand, which we typically divide between Consumption, Investment, Government Spending, and Net Exports. Higher rates depress spending on houses and cars, for example, and cause businesses to reduce their investment spending on new capital goods. The FED is still looking for a so-called soft landing, but every additional rate hike risks being the one that drives the economy towards the hard landing we’d all rather avoid. Second, the labor market has been hot for two years now. Unemployment has been at multi-decade lows for nearly a year. It’s hard to keep posting record employment growth quarter after quarter, even with expansionary monetary policy.
On the home front, South Dakota may be somewhat insulated by monetary policy considerations, but we are potentially more constrained by a lack of worker availability. South Dakota’s unemployment rate in Q2 was an unhealthy 1.9%, down from a similarly unhealthy 2.0% in Q1. It may seem odd to hear handwringing about low unemployment, but the issues can be real.
Labor markets are constantly trying to solve a highly complex sorting problem. Imagine there are unemployed workers on one side of the room, and on the other are businesses looking to hire. In this scenario, it’s easy to see how workers and businesses can find one another. Now imagine the workers are in one building and the businesses are in another all the way across town. Without cell phones and Google Maps, you can see how it might be a bit harder for workers and businesses to find one another. One last metal game. Imagine that workers and businesses are again spread out all over the town. This time, each worker also has a key, and each business has a job offer locked in a safe. The trick now is that you need the right key to unlock the safe and get the job offer. You’ve probably heard of required experience or minimum qualifications. Now it can be almost impossible to match workers and jobs. No matter how much a worker might want a job, they might not have the right key, i.e. the skills and experience, that a business is looking for. From the other side as well, no matter how much a business advertises a position or how much they are willing to pay, they might not be able to find the right worker.
When a labor market has too few people in the pool of unemployed, it can be challenging to match workers and jobs successfully. One negative outcome is an increase in bad matches that aren’t good for either party. Another potential outcome is greater churn in the labor market as workers move around, generally due to higher wage offers. This churn can be great for workers. There can be downsides for businesses, though. Greater churn, instead of employment growth, can feel like a zero-sum game, especially at the community level. Businesses that lose out can face real hardship through lost productivity or shrinking market share. These problems can arise whenever there are too few unemployed workers for the matching and sorting process, and the SD labor market continues to show signs of overheating.
Job openings in the state remain elevated, according to the JOLTS data. During Q2, South Dakota had an average of 29,800 open jobs per month, down slightly from Q1 but almost 50% higher than before the pandemic. A persistent spread between the number of job openings and new hires indicates that the pool of unemployed workers is too low to meet the labor market’s needs. Another sign of potential problems is the jump in quits from Q1 to Q2. The rise in voluntary quits could signify churn due to poor matches or employed workers jumping ship for better opportunities.