Labor markets are holding tight, despite fears of a global recession

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This month's top takeaways:

• 2023 will be tougher for most of the global economy than 2022. The U.S. economy is expected to weaken further, and regional recessions across mature and some emerging economies are almost certain.

• Despite economic uncertainty, labor markets continue to show signs of tightness thanks to significant demographic shifts, an aging workforce, and a historically high number of unfilled openings in many countries.

• Business formation in the U.S., which surged during the pandemic, remains strong despite negative headlines. If the surge proves durable, it could provide for a more resilient economy. 

• Internal career mobility is becoming an increasingly important priority within organizations around the world for talent retention, amid growing uncertainty and financial strain.

Global economic outlook

Economic uncertainty will be the dominant theme of 2023

For much of the global economy, 2023 is going to be a challenging year as the main engines of global growth– the U.S., Europe, and China–are likely to experience continued weakening activity. However, the prospects for individual economies will differ widely.

• Thus far, the U.S. economy is proving to be the most resilient with the labor market holding up reasonably well. This is a mixed blessing because the Fed may have to keep tightening monetary policy for longer to bring inflation down. We expect the U.S. economy to slow down further, which could lead to a mild recession in the middle of 2023. However, we don’t expect this recession to be nearly as severe as what we saw in 2020 or 2009.

• The European outlook has darkened and become more uncertain under a confluence of adverse forces. While the war in Ukraine has seen its tragic humanitarian impact continue to unfold, it has also been taking a growing toll on Europe’s economies through a worsening energy crisis. This pushed headline inflation up further which affected real income and consumer confidence. Finally, external demand has weakened further as growth in the U.S. and China continued softening. All these factors are affecting Europe’s regions differently and with different intensity. Output declines are projected in many European countries, including Germany, Italy, and the overall euro area. 

• The United Kingdom is beginning 2023 on the brink of a recession as households and businesses come under intense pressure from soaring costs of food, energy and other basic essentials. Economic activity has slowed sharply in recent months as consumers tighten their belts in response to soaring living costs, while business investment has slumped amid concerns over the strength of the UK and global economy. Continuing high energy prices are expected to weigh on activity, while higher borrowing costs for businesses and households after sharp rate increases from the Bank of England will also act as a drag.

Against the backdrop of slowing global trade and tighter monetary conditions, growth is expected to weaken in 2023 in most other advanced and emerging-market economies, before recovering somewhat in 2024. The slowdown in output growth in 2023 is not generally expected to be reflected in large rises in unemployment.

Hiring continues to slow down after historic highs

Hiring continued to decline in December 2022 amid increased uncertainty and a slowdown in global economic activity. Relative to December 2021, hiring was down across almost all countries; this was most pronounced in Ireland  (-26.7%), Brazil (-23.3%), India (-23.1%), and Mexico (-20.5%). Hiring has also declined in the U.S. as companies have started to tighten their belts and take a more judicious approach to recruiting. However, it is not a one-size fits all experience. For some businesses, the talent squeeze remains as acute as ever. For others, business leaders find themselves rethinking talent needs after a historic year of hiring.

After a period of exponential growth, the technology, information and media industry is seeing a reversal of over-hiring that happened during the pandemic

Across all major economies, we are witnessing a mass reversal of the over-hiring in the technology, information, and media industry—a sign of an expected recalibration of a sector that saw massive hiring gains throughout the pandemic. The slowdown in this industry, compared to the hiring frenzy that we witnessed over prior years (especially in 2021), suggests that the balance of power is already shifting back to employers. However, unlike traditional periods of economic slowdowns, those recently laid off in this industry offer a wide range of highly sought-after skills which creates a great opportunity for businesses of all sizes that are still looking to hire. That said, this could be seen as an opportunity for traditional companies seeking to renovate their business processes to recruit talent in a less competitive market.

Job markets around the globe are still chugging along, despite high inflation and waning economic growth

Despite the expected headwinds, the global labor market that tightened so much in 2021 has loosened a bit, but remains an economic bright spot in many countries. LinkedIn’s ratio of job openings to active applicants, our measure of labor market tightness, suggests that there are still jobs out there for those who want one, and the ratio remains nearly double the pre-pandemic average in several countries. 

Even as central banks’ interest-rate hikes bite and economies slow, it’s likely that labor shortages will continue to exist in many countries for the foreseeable future. One sign of ongoing labor shortages is that labor force participation still hasn’t recovered to pre-pandemic levels, mostly due to demographic changes (i.e. an aging workforce) and child-care responsibilities. These factors, amongst others, mean that the U.S. and other EMEA countries will be stuck with labor shortages for a while, whether or not there’s a recession.

In the U.S., we expect that the impact of a looming recession on unemployment to be relatively small. Our analysis of the historical relationship between job openings and unemployment (the Beveridge curve) using data from the BLS suggests that a decrease in job openings to the level prevailing in December 2019, before the onset of the pandemic, will be associated with an unemployment rate in the vicinity of 5%. Such an increase, from the current rate of 3.5%, is well below the peaks that we have seen during the Great Recession (2008) or the COVID-19 recession of 2020.

The Great Mismatch is here to stay

Many job seekers are still seeking work from home, but not as many employers are enamored with remote work as they used to be. While the number of remote openings has been gradually declining, the slowdown has mainly been driven by a shift in the industry mix of job postings–specifically the decline in openings in technology, information, and media—rather than a trend toward employers forcing employees back to the office. Some employers are still offering remote work as they can’t afford to hemorrhage talent. That’s especially true for high performers, so allowing remote work will be crucial for retention during the upcoming period of uncertainty. Remote work also opens recruiting to a larger geographic area and allows employers to tap into a larger talent pool. That’s a major advantage, especially for roles that require highly skilled and specialized talent. Finally, the offering of remote work is a key channel to support diversity and inclusion initiatives for many companies across all industries.

In the near term, we expect demand for remote jobs to continue to outstrip supply, as flexibility remains one of the top priorities for employees. While we don’t know yet how long this “Great Mismatch” in what employees want and what employers are willing to offer will last, we expect that the balance of power will start to shift back to employers gradually as the labor market shows more signs of cooling. 

As economic uncertainty persists, internal mobility is becoming an increasingly important priority within organizations for talent retention

The very tight labor markets around the world – which flipped the balance of power to employees and have helped them grow their confidence – provided job seekers with greater job optionality–adding more pressure on many businesses to meet their increasing demands. With the growing uncertainty and broad challenge among employers to fill open positions and reduce attrition, internal job mobility is becoming an important and growing priority for many businesses in the U.S. and other countries around the world. According to LinkedIn’s data, 93% of HR leaders agree that internal mobility is an important priority within their company, while 70% of HR professionals and hiring managers expect internal mobility to increase as a priority within their company in 2023. 

Along with cost savings, the most important benefit from internal job mobility is retention. LinkedIn data shows that employees who make an internal move are more likely to stay at their organization longer than those who stay in the same role. New data shows that employees who have moved internally (via either a promotion or lateral role change) have a 64% chance of remaining with an organization after three years. But employees who haven’t moved internally have only a 45% chance of being around after three years. 

France’s employee retention is low. Of the 15 countries we analyzed, France had the lowest retention rate at the 3-year mark, regardless of options for internal mobility. When compared to France, Germany had a 13% higher retention rate for those who moved internally, and an 11% higher retention rate for those who did not.

U.S. labor market overview

Despite widespread reports of layoffs hitting different sectors, the U.S. labor market remains one of the economy’s strongest pillars today. Job openings remain near historic highs, while the pool of available workers continues to shrink as the participation rate has shown no improvement through 2022. The need to retain workers by some businesses after their recent experiences of labor shortages and hiring challenges had limited layoffs so far even as the broader economy had softened. This behavior could also limit layoffs if aggregate economic activity were to soften further as we expect.

Hiring across the U.S. was 1.1% higher in December 2022 compared to November, and is down 10.3% compared to December 2021. Hiring conditions suggest that the labor market is beginning to slow in a more pronounced way across most industries. In fact, since June 2022 we’ve averaged a decline of ~0.6% per month.

Compared to December 2021, hiring in December 2022 declined in 17 of the 20 industries we track. The three gains were in Utilities (28% Y/Y), Farming, Ranching and Forestry (5% Y/Y), and Government Administration (3% Y/Y). Hiring in Technology, Information and Media saw the largest decline in December 2022 (-37% Y/Y) reflecting the painful recalibration from the massive hiring gains seen in this industry throughout the pandemic.

Looking at year-over-year trends, each of the 20 metros tracked by LinkedIn also showed slowdowns in December 2022: The smallest declines were experienced in Houston (-7% Y/Y), Miami (-7% Y/Y), and Phoenix (-8% Y/Y). The largest declines occurred in San Francisco (-25% Y/Y), New York City (-24% Y/Y), and Seattle (-23% Y/Y).

Despite looming talks of a recession and a slowdown in hiring over the recent months, hiring will likely remain challenging for the foreseeable future as employers continue to grapple with an aging workforce and changing demographics. Several factors suggest that the labor market will remain tight for some time.

• There’s still enough jobs for anyone that wants one. As of January 1, 2023, there continues to be nearly one job opening in the U.S. for every active applicant on LinkedIn. This ratio is double the 3-months average that preceded the pandemic, suggesting that employers are still seeking to fill some of their openings despite an uncertain economic outlook and elevated recession fears. 

• Labor supply continues to be constrained due to a range of factors such as lower-than-expected population growth, long-term Covid illnesses, early retirements, and a decline in immigration. This means fewer people are entering the labor force to actively look for work.

Despite recession fears, some industries tend to weather economic downturns better than others

While no job is wholly immune from a significant economic downturn, there are positions and skills that remain in demand regardless of how the markets perform. One industry that tends to remain stable when the markets dip is Government Administration. As people experience fallout from a downturn or economic volatility, there is a greater need for people who work to alleviate those challenges. Another key industry that is less likely to see employment shrink is the Education industry. Similarly, Utilities remain essential during good and bad times, providing protection for the people who keep them running. This industry is also one that gains a cloak of recession-proof protection from its linkage to government. Hence, the utilities industry is also likely to remain stable amid a downturn and one that is likely to have the least variation in hiring and employment. Finally, demand for consumer essentials like personal and household goods tends to remain steady throughout downturns, making the Consumer Services industry another segment of the economy that will less likely see employment shrinking.

Business formation continued to surge

One of the highlights of the pandemic was the surge in start-ups. After growing moderately prior to 2020, the number of unique companies on LinkedIn, measured by the number of LinkedIn members who added a new founder position to their profile, surged above trend with the start of the pandemic. The increase in new business formation began to take off in the middle of 2020 and continues to show strength even in the face of inflationary pressures–an added challenge for new firms during a time when their financial positions can be most precarious. This surged above trend during the pandemic and continued to grow through 2022. 

The increase in new business formation in part likely reflects a necessity to adapt in response to job losses during the downturn as well as an opportunity to fill new economic needs amid changing consumer preferences, supply chain issues, and novel circumstances brought on by the pandemic such as the surge in remote jobs which reduces the costs of a startup. If the surge proves durable, it could provide a more resilient economy.

Pandemic frontline industries continue to lead the surge in company formation

The surge in company formation remains broad-based across most industry sectors, as the number of LinkedIn members who added a new founder position to their profile was up across all industries relative to the base period of 2016. However, among all industries we track, those with the largest surges emerged in several areas of the economy most affected by the changing preferences and habits of consumers over the course of the pandemic. The three industries that recorded the highest activity in business formation as of Jan 2023 were Education, Hospitals and healthcare, and Retail. While the pace of business formation has cooled down moderately in 2022 across several of those industries that led the surge of 2020, there is no evidence yet that we are reverting back to pre-pandemic norms.

The outlook for the U.S. labor market going forward 

The U.S. labor market remains remarkably resilient, but it is conceivable that some weakening is already underway. While we expect the weakening to be slow and moderate, a significant decline in consumer spending will likely depress corporate earnings and profit margins, leading to further contraction in labor demand. Even though the tightening of monetary policy had clearly influenced financial conditions and had had notable effects in some interest rate-sensitive sectors, such as real estate, the timing of the effects on overall economic activity, the labor market, and inflation is still quite uncertain.

Although a further slowdown in economic growth would continue to weaken employers’ hiring appetite, the supply of workers seems likely to remain tight in the next few years due to a range of factors such as lower-than-expected population growth, long-term Covid illnesses, early retirements, and a decline in immigration. Without a focus on attracting workers on the sidelines of the labor force, the U.S. and many other countries will continue to struggle in filling long-term demand for years to come.

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Definitions

Hiring Rate. The LinkedIn Hiring Rate (LHR) is the number of LinkedIn members who added a new employer to their profile in the same month the new job began, divided by the total number of LinkedIn members in that country.  By only analyzing the timeliest data, we can make month-to-month comparisons and account for any potential lags in members updating their profiles. This number is indexed to the average month in 2016; for example, an index of 1.05 indicates a hiring rate that is 5% higher than the average month in 2016.
 

Labor Market Tightness. Tightness is measured as the number of job openings on LinkedIn divided by the total number of active applicants in a given month. We measure job openings as the stock of open job positions on the last business day of the month. To measure active applicants, we include all individuals applying from within the U.S., and who submit at least one application to a U.S.-based job posting.
 

Company Formation Index. CFI is the 3 month average count of unique companies on LinkedIn, measured by the number of LinkedIn members who added a new founder position to their profile. We only include LinkedIn members who added a founder position to their profile in the same month the new job began. This number is then indexed to the count in January 2016, which is itself set to 100; for example, an index of 105 indicates that company formation is 5% higher than in January 2016.