Economic Update | Labor Force Shaping Up as a Number to Watch in 2024

submitted by
Uric Dufrene, Ph.D., Interim Executive Vice Chancellor for Academic Affairs, Sanders Chair in Business, Indiana University Southeast

Consensus continues to build around the so-called “soft landing”.   This basically means that the economy will approach the Federal Reserve target of a 2% rate of inflation and will also escape a recession.  If there is a recession this year, it will be mild, and for many, the effects of such a recession will be minimal.  What happens in the labor market will be a major factor in any recession call.  We’ll use today’s column to get a closer view of a corner of the labor market that remains a significant challenge for both Indiana and Kentucky.

Nationwide, the labor market remains tight, but job growth is slowing compared to last year.   Over 2022, monthly job gains averaged just under 400,000 a month.  During 2023, job gains averaged almost 225,000 a month.  Even though the 2023 gain declined considerably from 2022, it is still an unusually high number.  We can expect some further deceleration in monthly job gains from 2023 as the economy continues to move toward normalization.     Even though job openings have come down, they remain stubbornly high and continue to exceed the number of unemployed.

One of the reasons why inflation declined from the June 2022 peak of 9.1% down to the latest reading of 3.4% is due to the supply side of the economy. Specifically, more workers returned to the labor force in 2023.   From the beginning of 2022 to the end of 2023, the nation’s labor force increased by approximately 4 million workers.  This provided headwinds to average hourly wages and was an important part of the disinflation story of 2023.  In March 2022, average hourly earnings were increasing by 7% over the year.  At the end of 2023, average hourly earnings were up by 4.3% over the year.   Another important anti-inflationary statistic is what is happening to productivity.  As productivity increases, average unit labor costs will decrease.  Employers can afford to pay more, and due to the productivity gains, declining unit labor costs will serve as an overall headwind to inflation. In the last two quarters, the U.S. economy saw significant gains to productivity, contributing to the disinflation in the second half of the year.  

While the nation’s labor force expansion was a key supply-side story in the fight against inflation, it is now contracting.  Since August 2023, the size of the nation’s labor force has gone down by about 400,000.  Last month, it declined by almost 700,000.  The labor force participation rate plummeted from November to December, dropping from 62.8% to 62.5%.  While payrolls were up in the establishment survey, the household survey showed that employment declined by almost 700,000. This could be part of the overall slowdown that economists have been expecting.  While a declining labor force could serve as a tailwind for inflation through average hourly earnings, an overall slowdown will counterbalance and result in overall disinflation.    Just as the Consumer Price Index became the biggest indicator to watch, labor force growth will garner some attention over 2024. 

Breaking down labor force by education attainment reveals some interesting trends. Labor force participants with a bachelor’s degree or higher almost exceed those with a high school diploma by almost 2 to 1. Labor force participants with a high school diploma total 35.7 million and with a college degree or higher, labor force totals 64.2 million.   We see a similar breakdown of the employed:  62.9 million with a college degree or higher remain employed, and the number of employed with a high school diploma stands at only 34.7 million. This is also evident in the unemployment rate by attainment. The high school unemployment rate is double that of those with a college degree:  4.2% compared to 2.1%. Despite the narrative, education attainment must be part of an overall economic development strategy.   The decline in the college-going rate for both Indiana and Kentucky is not promising. 

Across Indiana and Kentucky, labor force growth continues to be a significant challenge, perhaps partly an education attainment story. Over the long term, labor force growth for both states falls significantly under the national growth rate.  More recently, Kentucky’s labor force declined by approximately 3,000 over the year, and Indiana grew by just 13,000.      Other signs of a slowing economy show up for both states.  Indiana’s unemployment rate increased by 5/10ths of a point in a year, rising from 3.2% to 3.7%.  Kentucky’s rate increased from 3.9% to 4.3%.   Job postings are also slowing. Job postings, based on Lightcast data, peaked around March 2022 for both states and have been on a decline since, declining by 38%. We see a similar development for Louisville Metro, with job postings declining by 45% since March 2022. 

The last two years were all about inflation.  The big question was whether the Fed could reduce inflation without a significant decline in the economy.  The Fed now appears to have engineered what many thought was impossible:  a soft landing. As we start 2024, labor force growth may be shaping up as one of the key numbers to watch.   The early read has not been favorable.  

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