New Data Shows a Tight Labor Market

Jared McEntaffer - April 3, 2023
New Data Shows a Tight Labor Market

This issue of the Dakota Outlook introduces two substantial revisions that affect data previously reported in the forecast table. The first revision reflects a change in our reporting practices, while the second stems from data revisions by the US Bureau of Labor Statistics (BLS). In the first issue of the Dakota Outlook, we reported employment growth and unemployment rates based on period-end values rather than averages for quarterly and annual data. Going forward, we will use average values to better control for seasonal variations.

This quarter’s primary labor market story is the significant data revisions affecting the Local Area Unemployment Statistics (LAUS) produced by BLS. The updated LAUS data employed improved population controls and seasonal adjustment methods. As a result, the revised data should provide more accurate insights into labor market conditions for states, metro areas, and counties. Still, the required revisions affected the monthly data estimates as far back as January 2018.

Such data revisions are always interesting for an economist. This revision may be interesting to readers of the Dakota Outlook, as well, because it implies that the state’s tight labor market in the wake of the pandemic was even tighter than expected. Unemployment rates for 2018 and 2019 remained unchanged, but 2020 through 2022 saw moderate changes. The unemployment rate in 2020 was revised down from 4.4% to 4.2%, and 2021’s unemployment rate was revised from 3.1% to 2.6%. Finally, the average unemployment rate in 2022 decreased from 2.4% to 2.1%.

Labor Force Summary and Forecast

Source: Dakota Institute, Wells Fargo Economics, BLS
a Annual and Quarterly values are averages.

BLS did not revise its estimates for either employment or employment growth, so our understanding of job creation remains unchanged. The implications of these revisions are to reinforce what we already knew and to make the conclusions of the last Dakota Outlook even more salient. In short, South Dakota is suffering from a real labor shortage. The previous Dakota Outlook pointed out that unemployment was lower than at any time in the last fifty years, and now the data are saying that unemployment was even lower than we thought.

Perhaps owing to tighter-than-appreciated labor market conditions, employment growth at the state level failed to meet our growth expectations, coming in at 2.4% for 2022 compared to our forecast of 2.8%. Employment growth for the nation exceeded expectations, however, coming in at 4.2% for the year compared to the forecasted 3.1%.

In light of a more robust national labor market and a weaker one at the state level, we are revising our 2023 forecasts. We are raising our national employment growth forecast from flat to 2.2% and decreasing our South Dakota forecast from 1.2% growth to 1.0%. Similarly, we are lowering our 2023 unemployment rate forecast for the US from 4.9% to 4.5%. We are also lowering our South Dakota forecast from 2.8% to 2.4%. In this case, our revision is primarily a consequence of the BLS data revision than any expectation for a strong labor market to drive down unemployment.

South Dakota Monthly Employment Growth

Year-over-year Percent Change

Source: Dakota Institute, BLS

Turning to the BLS Job Openings and Labor Turnover Survey (JOLTS) data, we again had minor data revisions impacting the Q3 2022 data. The JOLTS data revisions reported here are commonplace, and the reader can expect frequent revisions to the most recent data from issue to issue. In the current case, the revised JOLTS data show the labor market was hotter in Q3 and Q4 than expected, which left our forecast for the year undershooting.

Job openings in the third quarter were revised upward by 9% from 28,900 to 32,700. Hiring was also revised upward by 600 hires from 20,400 to 21,000. Looking back at the second half of 2022, the JOLTS data show a labor market that is straining to effectively match workers and employers. For example, the average number of job openings per year doubled from 14,000 from 2001 to 2019, compared to 28,000 per year from 2020 through 2022. The data also show increased hiring, with 16,200 new hires annually before 2020 compared to 19,100 per year from 2020 to 2022. But the growing number of hires is closely following the rise in voluntary quits, which averaged 11,000 per year after 2020 compared to 8,400 per year before 2020. These data taken together indicate that increased job switching is driving the dynamics rather than organic growth.

Given the above considerations, we are revising our 2023 Labor Market Indicator forecasts. We had expected job openings to fall significantly in 2023. We now expect the drop in job openings to be more gradual and forecast job openings to average 29,500 per month for the year. Still, the severity of the Q4 economic slowdown and harsh winter conditions in Q1 2023 may impact this forecast. We also expect new hires and quits to come in slightly above our original 2023 forecast and have raised them from 18,400 to 19,000 and from 9,800 to 10,800, respectively.