4.4 million people quit their job in the US this September providing yet further evidence of the ongoing Great Resignation phenomenon. The quits rate – the number of voluntary separations as a share of total employment – rose to 3.0% in the same month, the highest since the start of the data series in December 2000. In the UK, the latest labour force survey flow estimates show that 391,000 people quit their job in Q3, the highest level since comparable data collection started in 2001.
Economists have been following the growing trend of people quitting their jobs with great interest in a bid to decipher what it says about the long-term impacts of the pandemic on labour markets. And what’s happening to labour markets – both in the US and in other countries going through similar experiences – is closely linked to the other key economic question of the day – inflation. Both the Federal Reserve and the Bank of England have hesitated so far to pursue significant monetary tightening (apart from the rather modest QE taper announced by the Fed earlier this month) in part because labour markets have yet to complete their recovery. Indeed, in the case of the US, total payrolled employment still remains 4.2 million (or 2.8%) below its February 2020 pre-pandemic level. In the UK, the employment gap stands at 550,000 (or 1.7%) compared to pre-pandemic levels following a drop off in the number of self-employed workers.
On the surface, this would suggest that there is still considerable slack in US and UK labour markets. However, this stands at odds with reports of labour shortages in a number of industries and record high job vacancies, which reached 1.2 million in the UK in the three months to October. Does the fact that people seem to be quitting their jobs en masse explain this seeming contradiction?
There is some evidence for that in the US, where the data allows us to see what’s happening in specific industries. The quits rate is particularly high in low-paying industries such as accommodation and food services (6.6%), arts, entertainment and recreation (5.7%) and retail (4.4%). This suggests that workers in these industries feel that they have sufficient bargaining power in the current economic climate to walk away from a job with poor working conditions or low pay. The fact that the active labour force is still more than 4 million people smaller than in early 2020 helps workers in these industries to keep the pressure on employers as there are fewer potential workers who might undercut their wage demands.
In the UK, an industry breakdown is unfortunately not available. However, the data show that of the 1.02 million job-to-job moves in Q3, 391,000 (38.4%) were due to people quitting rather than following dismissals or a renewal of a temporary contract. In absolute terms, this is by far the highest number of resignations on record. However, expressed as a share of all job moves resignations though high are well within the range of pre-pandemic trends. It could, therefore, be that we’re currently merely observing a catch-up effect as employees execute the job changes they have put off over the past 18 months.
It seems then, that fears that the pandemic has led to a widespread rejection of work by society are somewhat overblown. However, this doesn’t mean that current labour shortages are nothing to worry about. Crucially, a common and seemingly lasting effect of the pandemic both in the UK and US seems to be a lower economic participation rate. In the UK, data show that it is older workers in particular who have become economically inactive while among younger workers participation rates have risen for women and fallen for men. At Cebr, we have pointed out the risk of upcoming labour shortages repeatedly over the course of the year , which is further exacerbated by the fact that access to EU labour has become more cumbersome post-Brexit. Crucially, a permanent contraction in the active labour force would imply that central banks are missing the point if they are waiting for employment levels to return to pre-pandemic levels before tightening monetary policy. In the worst case scenario, higher wage settlements and rising inflation will start to reinforce each other well ahead of this.
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