Tom Barkin

The labor market story this summer has been employers’ struggle to find workers. Job openings are at a record level. And while 5.6 million fewer people are employed today than before the pandemic, there don’t seem to be enough people looking for work to fill the available openings. Labor force participation is down, and reservation wages are up.

But hiring is not employers’ only challenge. In what some are calling the “Great Resignation,” employers are also struggling to retain workers. In April, the quits rate — quits as a percent of total employment — hit a record high of 2.8 percent. In July, the rate was only slightly lower at 2.7 percent.

So far, these hiring and retention issues seem most concentrated in lower-paying jobs.¹ Recent increases in wage growth among the lowest quartile of wage earners and lower-skill workers — increases that outpace other workers’ — reflect employer challenges in recruiting and retaining these workers.²

Over the coming months, with enhanced unemployment insurance ending, schools reopening, and virus fears — hopefully — waning, we have been anticipating labor supply and demand to better balance. But contacts across the Richmond Fed’s district do not seem confident that we are near the end of the retention challenge, which in turn will further pressure hiring. They’re preparing for further churn on the horizon — and this time, they expect it to extend further into professional and managerial roles, where quit rates have not yet been as elevated.

A few signs point to continued and perhaps, more broad-based, pressure on quits.

The quits rate reflects confidence in the labor market. The Conference Board’s labor market differential — the difference between those who think jobs are plentiful versus hard to get — reached the highest reading (44.1 percent) in July since 2000. And this confidence can be contagious. As co-workers leave for other jobs, workers may become more aware of the opportunities they’re missing. And as new hires onboard with higher wages, current employees may consider a change to secure a higher salary.

There may also be a backlog of quits. Many workers hung onto their jobs over the past year and a half, waiting to make a move until the pandemic ended. Some may have been motivated by a desire to avoid further instability in an already unstable period. Others may have wished to avoid a fully remote onboarding experience. We may see some of this backlog clear over the next several months.

Some of those who stayed in their jobs have had to bear excess workloads as firms have operated short-staffed. This issue is most visible in restaurants as managers beg for patience with stretched-too-thin staff. But it’s not only an issue in service-sector jobs. Analysts who had to work long hours when the strong rebound caught employers who’d slowed hiring off-guard may also be ready to seek a better balance.

The reassessment of life and career choices that we have been hearing so much about may also keep quits elevated in the coming months. Twenty-two percent of American workers — and 30 percent of those younger than 40 — have considered changing their occupation or field of work since the pandemic began, according to a Washington Post-Schar School poll from July.³

And the return to office could expose new mismatches between employers and employees. Some workers who want to work remotely may find policies mandating a return to in person. A recent survey found that 17 percent of those working remotely during the pandemic would consider looking for another job if required to return.⁴ Others who are excited to return to the workplace may find their offices moving to remote. Those who moved to a new location during the pandemic may find even hybrid work impractical. Vaccine mandates may play a role too. People who won’t get vaccinated will find themselves required to find a new job; others may seek out a new employer that is willing to provide that guarantee.

What are the implications of the quits rate remaining elevated and potentially spreading further into professional and managerial roles? Employers, including those who have thus far been relatively immune, will want to prioritize investments that strengthen employees’ connections to the firm, its culture, and each other to minimize the risk of seeing their own wave of resignations.

For the economy as a whole, it could mean inflationary and productivity pressures.

A higher job switching rate suggests higher future wage growth.⁵ Workers switching jobs tend to command a wage premium. For example, job switchers saw 4.1 percent median wage growth in August, while job stayers saw a more modest 3.1 percent.⁶ Over time, even job stayers can see wage growth as employers become more concerned about attrition.

To maintain margins, employers turn to productivity improvements and price hikes.

We have seen this at lower levels of pay. For example, the adoption of QR code ordering systems has enabled restaurants to reduce demands on staffing while CPI prices for restaurants have increased to levels not seen since the 1980s.

Thus far, wage pressure seems to be concentrated in lower levels of pay. But increased churn among higher-paid workers could spark wage pressure in higher levels too. Pressure across the wage ladder would mean higher wage bills for employers which could lead them to pursue additional, perhaps larger, changes. And what does that potential for higher labor costs, productivity investments and price hikes mean? It means those of us paying close attention to our economic potential and inflation need to watch who’s leaving jobs as closely as we watch who’s taking them.