Economics and markets

Labor market pulse: Signs of softening in hiring data

August 24, 2023

Despite assertive interest rate increases by the Federal Reserve intended to counteract record inflation and cool the economy, the labor market remains robust. Demand for workers is exceeding supply in almost every industry, and nominal annual wage growth is running above 4%. However, there are signals—including some from our own retirement plan data—that suggest hiring is slowing, which could portend softening in the labor market down the road.

Vanguard’s proprietary data on enrollments in 401(k) retirement plans indicate employers are tapping the brakes on hiring: In July 2023, the hire rate was 2.1%, down from 2.4% in June 2023 and 3.1% in July 2022. This is consistent with recent data from the Job Openings and Labor Turnover Survey (JOLTS) published by the U.S. Bureau of Labor Statistics.¹

“Vanguard’s hiring data track JOLTS remarkably well and offer a fresh perspective on labor market trends based on daily enrollments among roughly 5 million retirement plan participants,” said Vanguard investment analyst David Pakula. “Ahead of next week’s JOLTS release, we are already seeing in our data that hiring is continuing to moderate.”

A look through Vanguard’s lens at hiring trends through two business cycles

The figure below displays both the Vanguard hires rate and the JOLTS hires rate since 2003. (Both rates refer to new hires as a share of existing employees.) Both series show a pronounced drop in hiring during the 2008 global financial crisis and a surge in hires after COVID-19 restrictions were lifted, followed by a gradual return to pre-pandemic levels.

The JOLTS hires rate spiked to 6.1% in May 2020, likely reflecting the surge in rehires of many hourly service workers who were temporarily laid off during the COVID-19 lockdowns. That rate remained elevated through 2021 and has since declined to a low of 3.8% in June 2023.

The Vanguard hires rate based on 401(k) enrollments, which favors workers at larger firms, rose more gradually after the initial COVID lockdowns, peaking at 3.5% in March 2021. It has since declined to a low of 2.1% in July 2023.

“The recent moderation in hiring suggests that businesses have largely filled the employment gaps caused by the pandemic’s disruptions,” said Vanguard economist Adam Schickling. “We may be at an inflection point in the business cycle, where firms become more conscious of labor costs and employed workers become more hesitant to leave their jobs.”

Vanguard hires rate versus JOLTS hires rate

A line chart showing the JOLTS hires rate and Vanguard hires rate from April 2003 through July 2023. The JOLTS hires rate begins the period at about 3.5% and is relatively stable with two exceptions: a notable dip during the 2008 global financial crisis and a spike during the COVID-19 recession. It finishes the period at 3.8% as of June 2023. The Vanguard hires rate begins the period at about 2.2% and is consistently below the JOLTS hirings rate but rises and falls roughly in unison with it, including during the global financial crisis. An exception is during the COVID-19 pandemic, when the JOLTS hirings rate spikes but Vanguard’s hirings rate drops sharply. Vanguard’s hirings rate finishes the period at 2.1% as of July 2023, down from 2.4% in June 2023.

Notes: Both hires rates refer 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. The series is seasonally adjusted using the X-13 ARIMA method. The dataset 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 JOLTS hire rate is based on a nationally representative survey of 21,000 nonfarm business and government establishments. The gray bars indicate economic recessions.

Sources: Vanguard, U.S. Bureau of Labor Statistics, as of July 31, 2023.

It should be noted that Vanguard hires data do not capture the whole U.S. economy, since only roughly half of workers—disproportionately 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. Vanguard’s hiring data contribute to an array of private sector sources of labor market data that complement federal surveys.²

A deeper dive into four labor market sectors

Hiring is not uniform across all industries. Here we highlight four diverse sectors that span the spectrum in hiring trends. Over the past decade, Vanguard data show:

Media, entertainment, and leisure hiring has dropped the most. This sector reflects more discretionary spending and generally exhibits higher labor market churn and greater sensitivity to business cycles. Hiring in this sector has seen the largest proportional slowdown, to 1.3% in July 2023, down 1 percentage point compared with July 2022. Despite continued retail sales growth in July, this slowdown in hiring could potentially be a sign that employers are cautious about increasing headcount.
Business, professional, and nonprofit services slowed as well. This tends to be a relatively higher wage sector and has been strong post-COVID. Still, the hires rate declined to 2.0% in July 2023, down 0.8 percentage points compared with a year prior, signaling that labor market softening isn’t exclusive to lower-paid sectors.
Manufacturing’s decline has been less pronounced. This sector, which is likely more sensitive to recent interest rate hikes, has seen some moderation from the elevated pace of hiring back toward pre-pandemic levels. The hires rate was at 1.7% in July 2023, down 0.4 percentage points from the previous year.
Education and health, by contrast, has ticked up. The hires rate in this sector rose in recent months to 1.6% in July 2023, up 0.1 percentage point relative to July 2022. Health care, in particular, has seen elevated labor demand as elective healthcare spending normalized post-COVID.

“Overall, the slowdown in hiring seems to be concentrated in industries with higher labor market churn, where natural attrition may be a powerful cost-cutting measure for firms,” said Schickling.

Hiring trends in four sectors, according to Vanguard data

Four lines show the hiring rates from January 2013 through July 2023 for four sectors: media, entertainment, and leisure; business, professional, and nonprofit services; manufacturing; and education and health. Three of the four sectors show a decline in their hires rates beginning around the end of 2021 through the end of the period. The exception is education and health, which starts on a similar downward trend but has recovered in recent months. As of July 2023, the hires rates were 2.0% for business, professional, and nonprofit services; 1.7% for manufacturing; 1.6% for education and health; and 1.3% for media, entertainment, and leisure.

Notes: 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 is adjusted upward to account for an empirically observed lag in 401(k) enrollment times for new hires. The series is seasonally adjusted using the X-13 ARIMA method. The dataset 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.

Source: Vanguard, as of July 31, 2023.

1 The JOLTS hire rate is based on a nationally representative survey of 21,000 nonfarm business and government establishments, although the response rate for this survey has fallen in recent years.

2 These data sources include LinkedIn’s Workforce Report, ADP’s Employment Report, Glassdoor’s Job Market Report, and Indeed’s labor market reports. The LinkedIn Workforce Report offers the metric on hiring trends most comparable to Vanguard’s, though with a very different source of data: It is based on active LinkedIn users who post new jobs to their profiles in the same month they began their new jobs. Vanguard 401(k) hiring data, in contrast, are based on new enrollments in 401(k) plans among retirement plans record-kept by Vanguard.