Nobody's being fired. Nobody's being hired

American employers have more or less stopped firing people, and more or less stopped hiring them too. The national hiring rate has fallen to 3.4 per cent, its lowest since 2014 if the first shock of the pandemic is left out, while layoffs remain near historical lows. The result is an odd, slow-moving equilibrium.

From great resignation to great stay

The contrast with two years ago is sharp. In 2021 and 2022 workers quit in record numbers, employers competed for staff with signing bonuses and pay rises, and job openings far outnumbered unemployed people. As the Fed raised rates that frenzy faded: quits fell, openings shrank and the rush to switch jobs slowed. What remains is a market where few people leave and few are let in.

The quits rate, which measures the share of workers leaving voluntarily each month, has now dropped below its level before the pandemic. That matters because quitting is a vote of confidence: people leave when they are sure of finding something better. A falling quits rate shows that workers have read the same signals as employers and are staying put.

Nobody in, nobody out

After two years of struggling to find staff, managers are loath to let workers go. They freeze open positions and leave departing staff unreplaced. Existing employees enjoy plenty of job security. For graduates and other newcomers, and for anyone trying to change jobs, the door is largely shut. An equilibrium with so little churn could tip into heavy layoffs if company revenues soften.

The comparison with 2014 is telling. Then, hiring was this slow while unemployment was still above five per cent and falling, as the economy recovered from the financial crisis. Now the hiring rate has sunk to the same level with unemployment at 4.3 per cent and rising. The direction of travel matters more than the level.

Who pays for low churn

The costs fall unevenly. Insiders keep their jobs but lose bargaining power, since the credible threat of leaving for a better offer is what forces employers to raise pay. The Atlanta Fed's wage tracker shows that the premium earned by job-switchers over those who stay put, which was large in 2022, has narrowed sharply. Young people and re-entrants bear the brunt, because a market with few hires is one where the unemployed wait longer for work. Over time the economy also loses some productivity, since fewer workers move to the firms that could use them best.

Hoarding has a history

Other economies have run this experiment. During the 2009 recession German firms kept workers on reduced hours rather than firing them, with the state topping up wages through its short-time work scheme, and German unemployment barely rose while American unemployment soared. When demand returned, German firms had staff in place and recovered quickly. The difference is that Germany's hoarding was subsidised and deliberate. American hoarding rests on managers' memories of the hiring crunch and on healthy profits, and it has no public backstop if either fades.

America has its own precedent, less happy. After the 2001 recession hiring stayed weak for an unusually long time, and economists coined the phrase jobless recovery to describe a period when output grew but employers were slow to add staff. Low hiring can persist for years, which is bad news for new entrants even if it never turns into mass layoffs.

How the balance breaks

Labour hoarding is a bet that demand will hold. Companies keep staff because hiring was so painful in 2021 and 2022, and because profits have stayed healthy enough to carry them. If revenues soften, that bet unwinds. The first signs would show up in weekly jobless claims and in continuing claims, which track how long people stay on benefits. Continuing claims have already drifted up to their highest level since late 2021, a sign that the jobless are taking longer to find work.

For the Fed, a low-hire market is a mixed blessing. Slow churn restrains wage growth, which helps bring services inflation down and gives officials room to cut at their meeting on 17 and 18 September. It also means the usual early warning from rising layoffs may come late, leaving policymakers less time to respond once the turn arrives.

The case for stability

There is a benign reading. Low quits mean fewer vacancies to refill, so a low hiring rate partly reflects calmer turnover after the upheaval of the pandemic rather than collapsing demand. Initial claims remain low, and corporate profit margins are wide enough that most firms face no pressure to cut. The equilibrium could persist for months if growth stays near its recent pace.

Rate cuts could also help preserve it. Lower borrowing costs ease the pressure on companies' finances and make it cheaper to carry staff through a slow patch, which is precisely the choice that keeps layoffs down. If the Fed moves quickly enough, managers may never have to test their commitment to the workers they fought so hard to hire.

July's job-openings figures, due on 4 September, and August's payrolls two days later will show whether the freeze is thawing or hardening. Low firing makes the US jobs market look stable, but with hiring this weak there is little cushion. A drop in demand would probably show up quickly as layoffs, and unemployment would then rise faster than it has so far. If the openings data slip further this week, expect the unemployment rate to keep edging up through the autumn, with graduates and job-changers bearing most of the cost before the layoffs begin.