One of the significant factors driving inflation has been the strength of the labor market. With unemployment still hovering around all-time lows, wage gains by employees have been nearly two times their longer term average. As the Fed continues its battle to slow the economy and talk of recession looms, where might the employment picture ultimate crack? It appears we may be heading into a white-collar led employment slowdown.
For a frame of reference, let’s take a look at the 2008 recession. In the lead-up to this bust, housing had been on fire. So too was the employment growth in that area. When housing ultimately broke, employment in areas like construction declined by 30%. Mortgage workers, realtors, and many others faced similar levels of employment struggles being directly tied to the excesses in the economy. So the question is, then, have we seen anything like this in recent years that is primed to bust to that same degree?
Current Employment Picture
Without question, covid caused some dramatic shifts in our labor markets. Notably, it seemed to cause a bit of a structural shift in unemployment. Many people retired early, immigration slowed, and others simply dropped out of the labor force given the surplus of fiscal support. This resulted in a lack of available workers generally. This has been part of the fuel behind the fire of wage gains and a tight labor market.
One of the places this structural shortage showed up most acutely was in the blue collar leisure and hospitality space. At the onset of covid, this sector cut jobs significantly. The overall workforce in this area was reduced by about 50%. Over the past year and half or so, however, there has been a huge resurgence in demand for these services as people sought out the experiences they missed during covid times. Even with the massive uptick in demand for these services and experiences, however, this area still has employment below pre-covid levels (owing at least in part to the structural shortages mentioned earlier). As a result, leisure and hospitality has been one of the biggest wage-gain beneficiaries over the last year. While it does seem that this wage strength needs to slow, this area probably won’t be the first unemployment domino to fall as an obvious glut hasn’t really developed here.
We should turn our attention, then, to the technology arena. Companies like Meta, Amazon, Google, Netflix, Zoom, Twitter – all the companies that saw a huge surge in demand for their products and services at the onset of covid. Much like the boom times in housing in the 2008 cycle, these companies hired like the trends in demand for their products and services during covid times would continue into perpetuity. As their revenues soared, hiring was excessive and little mind was paid to increasing costs and headcount. It seems like payback for this excess may be on the horizon.
Let’s take some of the major tech players, for example. Meta, Alphabet, Amazon – some of these companies increased their headcount by nearly 100%. Meta went from 44K employees in 2019 to 87K in 2022. Amazon went from 800K employees to nearly 1.6M employees now!
The hopes for endless covid-era demand have met a harsh reality. Demand in these areas has softened. While still seeing good growth, the levels are not at the outlandish rates seen during the boom times of covid. Technology stocks have been punished as profitability has suffered owing largely to hiring excesses, which have yet to be corrected despite the slowing growth. Further, with the Fed attempting to clamp down on demand, consumers having burned through excess savings, and covid-related spending binges (first on goods, now on services) potentially winding down, the economy appears to be facing a slowdown more generally.
This all points to the need for technology companies to enact sizeable layoffs. Some have already started – Meta has cut a tad more than 10% of its workforce, Netflix 5%, Amazon 3% – but these don’t seem to be sufficient. Staffing remains well above pre-covid levels.
Twitter is perhaps a good example. Say what you will about Elon Musk’s methods, but Twitter has shed 50% of its workforce and appears to be intact operationally. There might be some hiccups, but it doesn’t seem like staffing needs to return to twice its current size for the company to work. Will something similar soon be the fate of other technology companies? At the very least, Twitter and the housing-related areas of 2008 could serve as a guide.
Thus, we may be facing a while-collar led employment slowdown. Cuts of 20-30% in the technology sector alone could boost unemployment nearly 1%. This could ultimately soften demand, taking pressure off of other sectors like leisure and hospitality, eventually leading the way in bringing wage growth and employment back to manageable levels. Whether or not this is enough to overcome the structural employment problems that developed during covid, however, remains to be seen.
Full Disclosure: Nothing on this site should ever be construed to be advice, research, or an invitation to buy or sell any securities. Please see the Terms and Conditions page for a full disclaimer.