By many measures, the U.S. labor market outlook for 2024 is characterized by stability and normalization following pandemic-era volatility.
A dreaded recession appears less likely, inflation is trending lower and the labor market overall is holding steady after the disruptions of the COVID-19 pandemic. At the same time, job gains are expected to moderate, unemployment will tick up and wages will continue to cool.
Nick Bunker, economic research director for North America at the Indeed Hiring Lab, said there’s a case for optimism for 2024, but it’s best not to oversell it. “The labor market in 2023 didn’t follow the script many people wrote for it,” he said. “Despite many projections for a recession, a historically fast tightening of monetary policy by the Federal Reserve, a banking crisis, and geopolitical crises and uncertainty, the labor market stands strong.”
But just because last year was relatively calm does not guarantee a painless year ahead. “The full effects of the past 20 months of tightened monetary policy may be ahead of us, and things may slow further, as is widely expected,” Bunker said. He added that it’s possible that “the easiest hurdles on the road to a soft landing have already been cleared, leaving only the highest and most difficult for the last mile of the race,” referring to the Federal Reserve’s goal of raising interest rates just enough to slow the economy and reduce inflation without causing a recession.
2023 proved that “a high-demand environment and tight labor supply need not be permanently inflationary” and that “wage growth can slow without a spike in unemployment,” Bunker said. But, he warned, if conditions do not continue to cool as expected, “then the Federal Reserve may feel it has no choice but to tighten the screws even further, forcing a more immediate slowdown in place of the gradual one we’ve seen so far.”
Chance of Recession Is Lessening
The likelihood of a recession is much lower than it was one year ago, according to a January survey of 71 economists by The Wall Street Journal.
Andrew Flowers, lead labor economist at job advertising provider Appcast, said that consumer spending, driven by a strong labor market, helped stave off a recession in 2023, and he believes that momentum will carry forward this year. “The Fed’s soft landing is possible,” he said.
“If the unemployment rate remains relatively low, there are no unforeseen challenges with layoffs and inflation stays on its current trajectory, we should avoid a recession this year,” said Mallory Vachon, chief economist at LaborIQ, a compensation benchmarking software firm in Dallas.
Just 37 percent of U.S. CEOs say they are prepared for a recession, according to a recent survey of more than 1,200 executives by the Conference Board. CEOs rank recession as their top external concern for 2024, followed by inflation.
Economists are divided over when the Federal Reserve will cut interest rates this year, but most expect it to happen by the second half of the year.
“Rates may get cut late in the year, or it may not happen at all in 2024,” Flowers said, speaking against the consensus expectation. “The Fed does not want to fly the ‘Mission Accomplished’ flag too early, until it really knows inflation has been beaten. It is also sensitive about being viewed as partisan and will not want to be seen as helping the Biden administration by cutting interest rates in an election year.”
Hiring Will Moderate
Employment growth will remain positive in 2024, but at a much slower pace than in recent years.
“2024 will look a lot like the second half of 2023 when it comes to hiring and job gains,” Vachon said. “The continued cooldown means fewer opportunities, so hiring will focus on backfilling open roles as opposed to adding net new positions.”
Monthly job gains in the second half of 2023 averaged about 190,000, far below the 399,000 new jobs per month averaged in 2022. Some economists have forecast monthly payroll gains to average as low as 64,000 this year, while Flowers forecast an average of 100,000 jobs per month and Vachon predicted between 100,000 and 200,000 new jobs per month.
Health care and government will remain big drivers of job growth, Vachon said: “There is a huge long-term demand that will continue in health care.”
Leisure and hospitality, government, and health care together accounted for the bulk of job creation in 2023.
The decline in job openings and job postings will likely continue. Job openings as reported by the Bureau of Labor Statistics fell from a high of 12 million in March 2022 to 8.8 million in November 2023, and job postings on Indeed are down by over 20 percent from a peak at the end of 2021.
One reason for the decline is that total U.S. employment surpassed its February 2020 pre-pandemic peak in June 2022.
“At the same time, many employers have rethought their staffing plans in light of slowing economic growth, shifting consumer demand and higher interest rates,” Bunker said. “The pullback in job postings has been most stark in sectors tied to previously high-flying industries, including tech, where stock valuations have fallen and hiring plans have returned to earth. Sectors connected to companies that provide in-person services, including restaurants, hotels and hospitals, represent a continued source of robust hiring demand.”
Despite the challenges ahead for recruitment, employers still have plans to hire in the first quarter of 2024, according to the latest ManpowerGroup Employment Outlook Survey.
The staffing company found that 42 percent of employers anticipate an increase in hiring in the first quarter while 16 percent expect a staffing decrease, 39 percent plan to keep workforce levels steady and 3 percent are undecided.
“The latest survey reveals that while employer hiring confidence has moderated slightly amid global economic concerns, labor markets remain tight and demand for skilled talent is still strong across multiple sectors,” said ManpowerGroup Chairman and CEO Jonas Prising. “As companies continue to transform their business models, many are holding onto the talent they have and struggling to find the new talent they need.”
Unemployment Will Creep Up
Experts anticipate slight increases in unemployment and layoffs in 2024. Flowers put the unemployment rate at 4.2 percent by the end of the year, up from its current 3.7 percent.
“The labor market will bend but not break,” he said. “I don’t expect that the unemployment rate will go above 4.5 percent this year.”
Vachon agreed that there will be an uptick in unemployment and layoffs but noted that the current jobless rate is near a historic low. “Unemployment should remain relatively low unless there is an unexpected shock to the economy and layoffs may pick up a little bit, but overall, businesses are focused on retaining the talent they have and exercising caution about adding new positions,” she said.
Flowers said the main driver for layoffs in 2023 was the “tech-cession,” a correction to overhiring among technology companies during the pandemic, and that has mainly settled. “Other white-collar professions have shed jobs too, but that has settled out, and we have seen job postings for these occupations either level out or start to increase in recent months,” he said.
Bunker said the unemployment outlook for 2024 will depend not only on whether demand for workers continues to fall but also on how employers decide to manage falling demand.
“If demand for new hires continues cooling at roughly the same gradual pace as it has throughout 2023, then the labor market can be expected to continue on its current path without a spike in unemployment,” he said. “But while postings and openings remain elevated relative to historic norms, they are still at a much lower level than recent highs. A further, rapid descent from these lower levels could mean that fewer currently unemployed workers are getting hired, leading to a rise in unemployment. A prolonged contraction in overall demand for workers could also mean that employers would start to shed current workers and layoffs would start to mount.”
Some economists question whether the unemployment rate is the most informative signal of labor market tightness. Unemployment has remained low while interest rates have risen, layoffs have accelerated and reports suggest that job seekers are still facing a very competitive hiring market.
Any slackness in the labor market could be more evident in the labor force participation rate, which for prime-age workers ages 25-54 rose to levels not seen since the early 2000s. In December 2023, the prime-age participation rate was 83.2 percent, down slightly from an earlier peak of 83.5 percent in summer 2023.
“Consistently high demand for workers has both pulled more people into the labor force and kept more current participants attached to the job market,” Bunker said.
Wages Will Trickle Down
Bunker noted that one of the most apparent signs of the ongoing U.S. labor market cooldown is that wages are no longer growing at the pace seen over the last couple of years.
“Falling employer demand, increasing labor supply and diminished quitting has resulted in employers handing out smaller raises,” he said.
Wage growth has cooled, in parallel with inflation turning a corner, Flowers said. “At its peak, annualized growth was between 5-7 percent. Now it’s down around 4 percent, which is still historically high,” he explained. “Wages will continue to come down but stabilize above the historical average, mainly due to a tailwind from a pickup in productivity.”
Wage growth does seem to be on track to return to the healthy rate seen before the pandemic, Bunker said. “Wage growth between 3.5 percent to 4 percent would be consistent with 2 percent inflation [the Federal Reserve’s target], assuming labor productivity grows between 1.5 percent and 2 percent annually. Labor productivity is up 2.2 percent over the past year, but the underlying pace might be lower than that moving forward.”
Vachon said it’s hard to imagine annual growth in wages falling below 3.5 percent by the end of the year, based on the current pattern of inflation and labor demand.
“Just because hiring is starting to cool, it doesn’t mean employers can ignore wages and compensation strategy,” she said.