How Tight is the Labor Market?
Introducing LinkedIn’s Labor Market Tightness Metric
An article featuring LinkedIn’s Labor Market Tightness, authored by Rand Ghayad, Carl Shan and Yao Huang, was published in Harvard Business Review.
Researchers and policymakers alike have struggled in recent years with what available data imply about the tightness of the labor market. The labor market is “tight” when job openings are plentiful and available workers are scarce. It is slack when the opposite holds true. The Job Openings and Labor Turnover Survey (JOLTS) provides a measure of job vacancies. But how to measure the available workforce?
Traditionally, economists have relied on the number of unemployed persons–those individuals who do not have a job but are actively looking for work. Dividing the number of job openings by the number of unemployed people (V/U) in a particular month has been a standard way to assess how tight or slack the labor market is. The job openings per unemployed ratio tells us about the relationship between labor supply (unemployed people) and labor demand (job openings). In the U.S. the ratio reached its peak of 1.99 in March 2022, when there were nearly two job vacancies for every unemployed worker. The ratio declined to 1.7 in August due to a reduction in the number of job vacancies each month.
Though both the unemployment rate and the ratio of job vacancies to unemployment imply that the labor market was extraordinarily tight in 2021 and 2022, there is reason to question whether these standard measures capture the true degree of labor market tightness. First, the number of unemployed people may be a poor proxy for the availability of workers to fill vacant jobs, making V/U misleading. Second, in the early months of the pandemic not all of those unemployed were searching for jobs. Most of unemployed workers at the time believed their layoffs would be temporary (nearly 80 percent in April compared with 20 percent typically) and were not actively searching for a job. The temporary unemployed who were waiting for recall did not affect the tightness of the labor market in the same way as those who were permanently separated and actively searching for work. To understand labor market tightness, the job search behavior of potential job changers should therefore be considered.
Starting today LinkedIn will share a new metric, LinkedIn’s Labor Market Tightness, which provides a comprehensive view on the degree of tightness/slack in the labor market by accounting for all job searchers who are looking for a job (unemployed and employed). To the extent that employed workers are competing for the available set of job vacancies, the labor market may be considerably less tight than what is implied by the V/U ratio. Indeed, LinkedIn’s data suggests this to be the case.
In the above figure, we plot the conventional measure of labor market tightness, V/U in green. We also plot LinkedIn’s ratio of active job openings to active applicants (V/A). Our measure of active applicants captures not only unemployed searchers but also searchers who are currently employed and looking for work.
According to our measure, the U.S. labor market is considerably less tight than implied by the standard ratio of vacancies to unemployment, although it is still elevated compared with its pre-pandemic average. As of September 2022, the ratio of job openings to active applicants on LinkedIn is around 1.0, suggesting that there is a job available for every job searcher on the platform. Ratios greater than 1.0 signal tighter labor markets in which firms have more job openings than there are people looking for work. In contrast, ratios less than 1.0 indicate slack in the labor supply, as more job searchers compete for each job opening.
The differing behavior of the two measures reflects the fact that the standard tightness measure does not account for all those looking for work. In downturns, a more general index of job seekers rises proportionally less than unemployment. Empirical evidence suggests the unemployed are only about 30 percent of all active searchers, so that, all else equal, any percentage increase in unemployment has a proportionally smaller effect on the overall number of job searchers and on the degree of labor market tightness. Likewise, in booms the more general index of job searchers does not decline as much as implied by the decline in unemployment.
Future work will provide a more granular view on the labor market using different cuts of the Labor Market Tightness metric. Tightness by industry and region will be two areas of note; so too, will be an analysis of the breadth of occupations where employers were finding it difficult to source talent.
LinkedIn’s Labor Market Tightness metric is calculated as the number of active job openings posted directly on LinkedIn divided by the total number of active applicants. Active applicants are members who submit at least one application to a job opening in a given month. We measure active job openings as the stock of open job positions on the last business day of the month multiplied by an index of recruiting intensity calculated following the method developed by Steven J. Davis, R. Jason Faberman and John Haltiwanger (DFH). The key idea is that a slack labor market makes it easier for employers to hire in general, so less recruiting effort is required to achieve the same hiring rate.