Economics and markets

Labor market pulse: Hirings and separations slow

January 29, 2024

The U.S. labor market slowed in 2023, although it defied most expectations of a sharper slowdown, and proprietary Vanguard data suggest it will continue softening in 2024. Both the hires rate and the employee separations rate in Vanguard data continued trending downward in 2023, supporting our forecast of rising unemployment and a mild recession in 2024.

Slower hirings and separations suggest economic weakness ahead

“Both separations and hires have been on the decline recently, suggesting workers are less able to find new and better opportunities,” said Adam Schickling, a senior Vanguard economist. “Separations have outpaced hires in the past 10 months. This could be a sign that employers are not backfilling positions, possibly because of perceived economic weakness or uncertainty.”

December 2023 data from 401(k) retirement plans administered by Vanguard point to a continuing decline in hirings and separations activity:

The new hires rate stood at 1.9%, down 0.2 percentage points from October 2023 and 0.8 percentage points from December 2022. (The new hires rate is calculated as a percentage of the workforce.)

The separations rate was 2.2%, a decline of 0.1 percentage point from October 2023 and 0.3 percentage points from a year earlier. (Separations include employees who have left their employer voluntarily or involuntarily, but voluntary separations are generally far more prevalent.)

"Although there have been some recent pockets of labor market strength, including a strong December jobs report,” Schickling said, “analyzing multiple signals is key for evaluating the labor market’s potential impact on the overall economy.”

Hirings and separations continued on a downward trajectory in December

The chart has two lines. One line in the chart shows Vanguard’s hires rate from April 2003 through December 2023. It begins the period at 2.7% and varies after that, with a notable dip during the global financial crisis and a spike in the COVID-19 recession. It finishes the period at 2.2% in December 2023. The other line shows Vanguard’s separations rate from July 2003 through December 2023. It begins the period at 2.4% and varies after that, with a notable dip during the global financial crisis and a spike in the COVID-19 recession. It finishes the period at 1.9% in December 2023.

Notes: The hires rate refers to new hires as a share of existing employees. The Vanguard hires rate is calculated at the firm level and is based on new enrollments in 401(k) retirement plans administered by Vanguard divided by the number of all active 401(k) plan participants in a given month. New hires are recorded based on their hire date rather than their retirement plan enrollment date. The last 12 months of the Vanguard hires series are adjusted upward to account for an empirically observed lag in 401(k) enrollment times for new hires. Separations are calculated by subtracting the monthly change in the number of all active 401(k) plan participants from the month’s hires. Separations are then divided by the number of all active 401(k) plan participants in a given month to derive the separations rate. This series is smoothed over a three-month period to remove noise in the data. Both the hires rate and the separations rate series are seasonally adjusted using the X-13 ARIMA method. The data set represents a balanced sample of firms of all sizes across all sectors of the economy that offer retirement plans, which Vanguard has administered since January 2003. The gray bars indicate economic recessions, as identified by the National Bureau of Economic Research.

Source: Vanguard, as of December 31, 2023.

Government data also point to a moderation in the labor market

Data from the Job Openings and Labor Turnover Survey (JOLTS), published by the U.S. Bureau of Labor Statistics, are largely consistent with recent trends in Vanguard data. Both are showing a moderation in hirings and separations across the economy, although the downward trend is a little less pronounced in the JOLTS data. And while the JOLTS data are still showing hires outpacing separations whereas the Vanguard data have shown separations now exceeding hires, the trends are converging.

The JOLTS data’s broader representation in terms of industry and firm size may be responsible for some of the modest differences.

“The government and health care sectors together explain roughly half of all new job growth in 2023,” said David Pakula, a Vanguard investment strategist. “These industries are underrepresented in the Vanguard 401(k) population, so it’s understandable that the Vanguard 401(k) series presents a more cautious assessment of the labor market than the JOLTS data.”

The JOLTS paints a similar picture of softening in the labor market

The chart has two lines. One line in the chart shows JOLTS hires rate from April 2003 through November 2023. It begins the period at 3.5% and varies after that, with a notable dip during the global financial crisis and a spike in the COVID-19 recession. It finishes the period at 3.5% in November 2023. The other line the chart shows JOLTS separations rate from May 2003 through November 2023. It begins the period at 3.6% and varies after that, with a notable dip during the global financial crisis and a spike in the COVID-19 recession. It finishes the period at 3.4% in November 2023.

Notes: JOLTS data are based on a nationally representative survey of 21,000 nonfarm business and government establishments. The gray bars indicate economic recessions, as identified by the National Bureau of Economic Research.

Sources: Vanguard and the U.S. Bureau of Labor Statistics, as of November 30, 2023.

“While the U.S. economy and labor market proved much more resilient to higher interest rates in 2023 than many were expecting, we highlight in our 2024 outlook that the offsets fueling this resilience, such as pandemic-boosted household and corporate balance sheets, are fading,” Schickling said. “Our outlook is for a mild recession in 2024, resulting in modestly higher unemployment in order to bring inflation sustainably back to the Federal Reserve’s 2% inflation target. The labor market trends in these data provide additional support for that view.”

About Vanguard hires and separation data

Vanguard’s proprietary hires and separation data are rooted in real-world enrollments and participant counts in 401(k) retirement plans.

It should be noted that Vanguard hires and separations data do not capture the whole U.S. economy, since only roughly half of workers—a group disproportionately composed of higher-income workers—have access to employer-sponsored retirement plans. Moreover, employers that offer 401(k) plans tend to be larger, more mature, and concentrated in certain industries.