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Expect the job market to stay tight — even if the economy heads into a recession

A cashier wearing gloves.

A number of economic factors, including lower-than-normal labor force participation, declining immigration, and retirements among Baby Boomer-aged workers means that labor shortages may persist well into the future. Photo by Brad Lee/AFP via Getty Images

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Even as the Fed’s interest-rate hikes bite and the economy slows, it’s likely that the job market will remain tight and labor shortages acute for the foreseeable future.

Some big companies are cutting back on employment, and first-time jobless claims are on the rise. But employers are still having to scramble to attract and hire workers, who have lots of options and leverage.

“Despite talks of recession and headlines around layoffs, our research shows that hiring is remaining strong,” says Megan Slabinski with consulting firm Robert Half. “It is still a labor shortage. There are nearly two job openings for every individual that is unemployed today. And job optimism among employees continues to be very high.”

Employee confidence in keeping their jobs and potentially finding a new one have led workers to quit at near-record rates. That means employers are struggling to replace workers while simultaneously trying to add workers to meet strong consumer demand.

Frank Fiorille at the small-business HR firm Paychex points out that businesses have already spent a year or more competing to staff up after the early-pandemic shutdowns.

“Those business owners had such a hard time filling those jobs and finding people, that they’re very reluctant to let them go right now—until things get really, really bad,” he said.

One sign of ongoing labor shortages is that labor force participation still hasn’t recovered to pre-pandemic levels. Some people who were working before the pandemic are still on the sidelines, mostly because of child or elder-care responsibilities, or fears of getting COVID.

Those effects are likely to fade over time, says Joseph Brusuelas at consulting firm RSM, but longer-term labor trends mean staff shortages may linger.

“The labor market will continue to look tight by historical standards,” he said. “And there’s not much that anyone’s going to be able to do about it because it’s driven by largely demographic changes.”

According to Brusuelas, the labor force grew by about 1% a year for decades.

“But as the long echo of the post-war Baby Boomers — who are now retiring — impact the economy, we’ve seen labor market growth of less than half-a-percent, in fact it’s closer to 2 tenths of a percent,” he said.

Meanwhile, immigration has fallen dramatically in the past several years, a result of restrictive policy and the pandemic.

All of these factors mean the U.S. will probably be stuck with labor shortages for a while, whether or not there’s a recession.

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