Seasonally adjusted data from the BLS, calculations by Mish

Tweet of the Day

I've started following the Labor Leverage Ratio (ratio of quits to firings). I feel like that is a very good proxy for the tightness of the labor market:https://t.co/FmLH6UUboS

— Jacob Larsen 🇺🇸 🇩🇰 🇺🇦 (@SLCPaladin) May 11, 2023

Labor Market Tightness

Here's my correction to the above Tweet: "I've started following the Labor Leverage Ratio (ratio of quits to firings). I feel like that is a very good proxy for the tightness of the labor market."

That caught my attention. The ratio is actually quits to layoffs and discharges, a slight correction.The Tweet linked to the article The Labor Leverage Ratio: A New Measure That Signals a Worker-Driven Recovery by Aaron Sojourner and Emily DiVito.

The article is from February 4, 2022 and is more than a bit stale. At the time, the Labor Leverage ratio was at a record high. 

The American labor market is experiencing a Great Upgrade. Workers are quitting jobs at record rates to take better jobs elsewhere, and layoffs are at a record low. To understand what this means for workers, we calculate what Sojourner has coined the Labor Leverage Ratio (LLR): the number of quits initiated by workers compared to discharges, including firings or permanent layoffs initiated by employers. 

The greater worker bargaining power signaled by a higher LLR is one of the silver linings of an otherwise long, devastating pandemic. COVID upended established workplace norms, raised serious concerns about worker health and safety and employer profitability, and changed the circumstances of many workers’ lives. Employers reacted with big changes to workplace procedures such that many previously satisfied employees find themselves working under conditions they never expected. Individual workers and organized labor responded accordingly, demanding better working conditions and higher pay. And many worker and labor groups are using the pandemic as a catalyst for more aggressive collective action.

The key ratio is quits to layoffs and discharges, including firings or permanent layoffs initiated by employers. 

Lead Chart Notes

• Data for this series dates only to December of 2000. 
• Total Nonfarm and Total Private produce similar results. Those series' are seasonally adjusted. 
• The current data, March of 2023, is nearly back to pre-pandemic norms but is somewhat above the 2008 and 2001 recession. 

The idea is somewhat flawed in regards to specific sectors, but I like the overall idea. 

The key problem for sectors is the extremely cyclical nature of the data. Although seasonally-adjusted data is available for total nonfarm and total private, layoff data is not seasonally adjusted. 

Labor Leverage Ratios Select Industries 

Unadjusted data from the BLS, calculations by Mish

The cyclical nature is obvious, and that's a problem. By sector, seasonally-adjusted data is available for quits but not layoffs. 

In the above chart, I used unadjusted data for both series'. A mixture increased the amplitude. 

Labor Leverage Ratios Select Details 

Unadjusted data from the BLS, calculations by Mish

Labor Leverage Ratios Select Services and Month 

Unadjusted data from the BLS, calculations by Mish

Seasonal Adjustment Madness

The leverage ratios for the retail trade and education sectors are surely wrong. There is no realistic way leverage is increasing for retail trade given all the bankruptcies and mass layoffs.

A quick look at the data shows the leverage is 4.88 now but 2.31 in January. This is seasonal adjustment madness.

There are 70 Major Bankruptcies in Just 4 Months This Year

Please note There are 70 Major Bankruptcies in Just 4 Months This Year

For 2009 there were 118 bankruptcies through April. In Covid-impacted 2020, there were 71 bankruptcies. In 2023 there have been 70.

This is the third-worst start to the year since 2000. 

Falling Leverage

Workers' leverage is undoubtedly slowing.

There is falling consumer sentiment, falling retail sales, and increasing recession fears. Key businesses are laying off workers and bankruptcies are on the rise.

Job Openings Dive But Quits Tell a Better Story of the Weakening Job Market

On May 2, I commented Job Openings Dive But Quits Tell a Better Story of the Weakening Job Market

Job openings have dropped by over 2 million from the peak but are still at an elevated level. Voluntary quits tell a better story of the strength of the market.

Quits have peaked everywhere.

With layoffs jumping in the leisure and hospitality, construction, and health care sectors, the odds of a Fed "accident" keep increasing.

What About Job Openings?

Too many analysts rely on job openings as a sign of labor market strength. 

For discussion, please see Job Openings Plunge From Dizzy Heights, How Much is Still Real?

Do you believe job openings are as strong as reported? I don't and never did.

In contrast, a focus on quits and the Workers' Leverage idea seems like the real deal. 

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