Senior Analyst, Sterling Infosystems
For the past few months, the size of the loss in nonfarm payrolls has been shrinking. Although the economy is still shedding jobs, the fact that the loss has been getting smaller is an encouraging sign that the recession is coming to an end. But questions remain about when will payrolls finally stabilize and what will be the pace of their future growth. To offer insight, in this piece I will examine the two subcomponents that affect employment: hires and separations. After all, the change in employment is just the difference between hires and separations.
The Bureau of Labor Statistics publishes a survey called the Job Openings and Labor Turnover Survey (JOLTS). It publishes nonfarm hires and separations on a monthly basis, lagging the total nonfarm payrolls by one month. Although mixing BLS surveys can be dangerous, recent improvements to the JOLTS methodology has made it comparable to nonfarm employment.
As of July, the JOLTS survey reported a increase in hires and a slight decrease in separations, hence a narrowing loss in employment. But some interesting things are going on within separations. As expected, for the last 12 months layoffs have been high. Layoffs peaked at 2,568k seasonally adjusted in January. This is the largest amount of layoffs since the JOLTS began in 2001. Furthermore, as of July, layoffs have only decreased by 9.4%. It appears layoffs are still a problem.
But what is less obvious, yet intuitive when you think about it, is the significant reduction in quits. People are hanging on to their jobs during tough times. In July quits hit a low point for the JOLTS at 1,730k seasonally adjusted. This is a 45.4% decrease as compared to a peak in quits in December 2006.
Adding this all together, despite the large number of layoffs, the significant reduction in quits has kept the overall number of separations very low. In fact, during a recession when people think of lost jobs, as of July the amount of separations reached its lowest point since the JOLTS began.
Looking forward, as employers finish correcting their staffing levels, the number of layoffs will go down. Assuming quits remain constant, this will reduce separations and help stabilize nonfarm payrolls.
But will quits remain constant? Quits are at a very low level. With the worst of the downturn behind us, is it possible that people who have clung to their jobs will start looking for their next career move? Will quits increase? Furthermore, as employers slowly increase their appetites for new hires, perhaps they will start by hiring the currently employed, not the unemployed. However, hiring the currently employed will result in no change in total employment – for every hire there is a corresponding quit. For actual payroll growth, the unemployed need to be hired.
Therefore, for nonfarm payrolls to stabilize and grow, more hiring is not the complete answer. The willingness of employers to hire beyond the number of quits will be the driver of payroll growth. The speed in which employers choose to ramp up hiring to compensate for an increasing number of quits will be important. However, employers may be apprehensive. They may choose instead to increase hiring gradually. And with the shock of the recession still felt, employers engaging in cautious hiring may be able to satisfy their short-term growth initiatives by simply trading the currently employed.
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