Labor hoarding looks close to a painful end

The labor hoarding that’s kept unemployment in check as the economy cooled looks about done. Prime-age workers now risk dealing with the same unwelcoming job market that young graduates and the unemployed have struggled in for the past year.

Workers are emerging from a period during which employers, wary of the difficulty they had hiring in 2021 and 2022, were reluctant to let staff go even as business conditions weakened in many industries. With slack growing in key parts of the labor market, companies that want to trim headcount now know there’s a ready pool of candidates available when they want to rehire.

Hoarding labor made sense in recent years, benefiting those in the 25- to 54-year age bucket. The unemployment rate fell as low as 3.4% in 2023, and there were nearly twice as many job openings as unemployed workers around, according to the Job Openings and Labor Turnover Survey. Even as job growth cooled, there was still an excess of labor demand relative to supply, and memories were fresh of how hard it had been to hire and retain workers following the brief surge in unemployment during the pandemic.

Early-career workers and those who had lost their jobs bore the brunt of that initial slowdown as companies put their hiring plans on hold. The unemployment rate for 20- to 24-year-olds has been steadily rising over the past year and reached its highest since 2015 in August, outside of the pandemic period. Nearly two million workers have been unemployed for more than six months, up from 1.1 million at the start of 2023. All told, there are slightly more unemployed workers available now than there are jobs to fill.

At best, the labor market is in a "curious kind of balance" Federal Reserve Chair Jerome Powell said at Jackson Hole last month. Importantly, the growing number of long-term unemployed and younger workers are likely quite motivated to take whatever job opportunities come their way.

Even if the total demand for labor remained steady rather than deteriorating, companies looking to cut costs have an incentive to shift from the low-hiring-low-firing approach they’ve been pursuing. More churn would probably work to their advantage. People who switch jobs usually get bigger wage increases than people who stay in their roles, likely because workers tend to move for more money. But in the past few months, job switchers have been getting smaller pay raises than people staying put, according to the Atlanta Fed Wage Growth Tracker. Perhaps workers at risk of being laid off are making preemptive moves, even if they must take a pay cut, to secure positions that they perceive as safer.

In a labor market that’s been characterized lately as "the Big Stay," companies may decide that the way to shed costs while keeping headcount steady is to lay off more experienced and expensive workers and replace them with younger and cheaper workers, who are hungry to learn and grow.

Arguably, prime-age workers feel this softening in their prospects even if it hasn’t yet shown up in the unemployment rate, which remains at a relatively low 4.3%. In the Conference Board’s monthly consumer confidence survey, 20% of respondents said that jobs are hard to get, the highest since 2021. For those who lose a job, the prospects of finding a new one within three months dropped to the lowest in records going back to 2013 in the Federal Reserve Bank of New York’s Survey of Consumer Expectations.

Nobody is hoping that this scenario comes to pass — firing older workers to take advantage of the desperation of a growing number of young, unemployed workers is a brutal kind of arbitrage. At the same time, most arguments about the resilience of the labor market rest on relatively stable conditions for prime-age workers and downplay the fraying at the edges of the labor market. We’ve been lucky that layoffs have stayed relatively low until now, and the rise in the unemployment rate has been slow. But the fundamentals underlying this equilibrium continue to weaken and there’s no reason to think prime-age workers will be insulated from a further deterioration.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Conor Sen is a Bloomberg Opinion columnist. He is founder of Peachtree Creek Investments.