- Today, we are honored to introduce to you by Pavus Skrzypczynski, Economist at the National Bank of Poland. The views expressed in this article are those of the author and should not be attributed to the National Bank of Poland.
We provide an update on the job-worker gap discussed in previous posts: [1], [2], [3], [4], [5].
Recall that our April 2023 update based on data through March 2023 showed that the Jobs-Worker Gap Business Cycle Indicator (JWGBCI) reached the recession threshold of -0.9 percentage points. The indicator has since contracted further. Recent data released by the U.S. Bureau of Labor Statistics allows us to update the employment-to-worker gap for October 2023 and the business cycle indicators based on it. In October 2023, the employment-to-worker gap was 1.3% (2.3 million people), significantly lower than in March 2023 and much lower than the record high of 3.7% (6.1 million) reached in March 2022.
figure 1. Job and labor gap (percentage)
Meanwhile, the Jobs-Labor Gap Business Cycle Index (JWGBCI) fell to -1.4 percentage points in October 2023, further below the recession threshold of -0.9 percentage points. Recall that this indicator uses a smoothed gap, whereby we calculate the three-month moving average of the gap between jobs and workers relative to the maximum value in the previous twelve months.
figure 2. Employment-Labor Gap Business Cycle Indicator (Percentage Points)
Formally speaking, using recent employment and worker gap data and business cycle indicators based on this, we conclude that labor market conditions have softened to a point historically sufficient to declare that a recession has begun. Be aware that doing this would be a huge mistake. Why? During this expansion, job openings surged, leading to a record-high gap between jobs and workers. Note that as of October, the gap between jobs and workers was still much higher than pre-pandemic levels. This translates into the dynamics we now observe in the JWGBCI, which suggest a recessionary trend but actually reflect moderating labor market conditions. Additionally, take a look at other economic data used by the NBER to track economic cycles. Overall, the data is definitely saying “no worries” right now.
One very important thing to mention in terms of recession calls and labor market data is the Sahm Rule, developed by Claudia Sahm. The JWGBCI proposed here is very similar to Sam's rule based on smoothed unemployment rate. To derive the Sam's Rule indicator, we calculate the change in the three-month moving average of the unemployment rate relative to the lowest value in the previous twelve months. The threshold that triggers Sahm's rule is 0.5 percentage points. Note that during this expansion, the JWGBCI begins to move much faster than the Sahm Rule indicator, which is entirely correlated with job openings that do not feed into the latter indicator.
image 3. Employment-Labor Gap Business Cycle Indicator and Sam's Rule (Percentage Points)
Upcoming labor market reports, including the one we receive this Friday, will reveal how things evolve, but it's important not to panic about any indicators that try to track the cycle through the lens of historical linkages. In fact Claudia Sahm wrote a very good article on this issue not long ago (Why might this time be different?). Keep in mind that this expansion has repeatedly proven different than past experiences, which is why you should approach all current calls for a recession with more caution than usual. Under normal circumstances, we do poorly at tracking business cycles in real-time, and in the post-pandemic period, which is far from “normal as we know it,” we may do even worse.
The author of this article is Pavus Skrzypczynski.
