Labor Market on a Tightrope: The May Employment Situation

The June 2024 jobs report painted a picture of a labor market walking a delicate balance, trying to balance strong job gains against rising wage pressures and stubbornly high inflation. The unemployment rate ticked up to 4.0%, the first time it has crossed that threshold in 27 months. Payrolls still grew by a robust 263,000 jobs, continuing an impressive streak of employment gains over the last year. But with the labor force participation rate dipping, it highlights the difficulties employers face in attracting and retaining talent.

But while the total number of jobs keeps growing, the number of hours worked is declining, which suggests that companies are responding to this slowdown by cutting hours instead of cutting jobs. Productivity rates remain high, likely boosted by technology, which allows employers to produce the same output with fewer labor hours—reining in costs without losing the workers they struggled so hard to hire over the past few years. 

"The jobs report showed us hours worked went down from last year but we're not seeing layoffs across the board," said Lightcast Senior Economist Rachel Sederberg. "This is a symptom of how hard hiring is. Employers went through that and don't want to do it again, but they know they can't cut wages because then they won't retain employees, so their solution is to cut hours."

Another trend in the data is that job gains were heavily concentrated in industries that employ lower-wage workers with less formal education; sectors like leisure, hospitality, healthcare, and construction. In contrast, job prospects appear more limited for those with bachelor's degrees. This trend has continued across the past several reports, suggesting a deep-set divide in the economy.

"There are two distinct experiences for Americans,” Lightcast Senior Economist Elizabeth Crofoot explained. “Those with a bachelor's degree are able to enjoy a strong stock market and burgeoning home values, though job prospects may be limited. Those with less than a bachelor's degree feel the sting of inflation and higher interest rates acutely, but have strong labor market opportunities as employment growth continues in blue-collar sectors."

The labor force is also becoming increasingly driven by immigration, with all employment gains in May going to foreign-born workers while employment for native-born workers declined. With demographic shifts underway, companies will need to double down on diversity and inclusion efforts to attract talent from these growing labor pools.

Overall, the June jobs report highlighted a labor market in a difficult position, trying to maintain robust job growth and low unemployment against painfully high inflation and rising wage pressures. The Federal Reserve will see positives like slowing wage growth, but also potential causes for concern in resurging labor force dropouts.

As Crofoot summarized: "The Fed is on the razor's edge of a tightrope, needing to balance rising wage pressures from this robust job market against cooling inflation." Striking that balance will be one of the key challenges for policymakers in the months ahead, while employers will need to be more and more deliberate about making the most of their existing workforce.