Human Truth Podcast | Ep. 08 What signs of recession can we see from the labor market?
In this episode of the Human Truth Podcast, labor economist Betsey Stevenson joins to talk signs of recession (or not!) seen in the job market.
Welcome to The Human Truth Podcast where, each episode, we take a closer look at a popular workforce statistic ripped from the headlines and ask: Where’d it come from? Is it true? And why should we care?
In this episode, we examine a recent stat from Goldman Sachs on signs of recession (or not) from the job market:
There’s only a 35% chance of a recession because companies have been shedding job openings in response to the Fed’s rate hikes.
Host Ian Cook is joined by Betsey Stevenson, Professor of Public Policy and Economics at the University of Michigan and former Chief Economist of the U.S. Department of Labor, to discuss the likelihood of a recession and its impacts on the labor market. Dr. Stevenson is a labor economist who has published widely in leading journals about the impact of the labor market and public policy on individuals and families. Her research explores women’s labor market experiences, the economic forces shaping the modern family and how these labor market experiences influence each other. She’s a former economic advisor to President Barack Obama and is currently the co-host of the Think Like an Economist podcast along with Justin Wolfers.
On the podcast this episode:
Host, Ian Cook is Visier’s VP of People Analytics
Guest, Betsey Stevenson, Professor of Public Policy and Economics at the University of Michigan Gerald R. Ford School of Public Policy
Learn more about signs of recession and the labor market:
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Episode transcript:
Producer: How to recession proof your business. Did you know recessions last 12 to 15 months on average. And that means every move you make today has an impact on how you recover when the business cycle flips back to growth. By making the right talent decisions today, you’ll be more prepared for recovery tomorrow. Download or guide How To Recession Proof Your Business. To learn how go to visier.com/podcast for the link. It’s the Human Truth Podcast where each episode we examine a workforce statistic ripped from the headlines and ask where did he come from? Is it accurate and should we care? This week we’re looking at a stat from Goldman Sachs who claimed that they only see a 35% chance of recession due to an interesting quirk in the labor market. For that, let’s get into it with host Ian Cook and special guest, Betsey Stevenson, professor of Public Policy and Economics at the University of Michigan Ford School of Public Policy.
Ian Cook: Hi, I am Ian Cook, the host of the Human Truth Podcast. Today we are talking about recession and some of the indicators or the less obvious clues that can be taken away from the current labor market. To unpack this fascinating and definitely complex topic, I am joined by Betsey Stevenson, a professor of public policy and economics at the University of Michigan. Dr. Stevenson is a labor economist who is published widely in leading journals about the impact of the labor market and public policy on individuals and families. Her research explores women’s labor market experiences, the economic forces shaping the modern family and how these labor market experiences rend up influencing each other. She’s a former economic advisor to President Barack Obama and is currently the co-host of the Think Like an Economist podcast along with Justin Wolfers. So Betsey, welcome. Thank you so much for joining us. Just can you tell us a little bit about the work you do and your interest in this labor market piece?
Betsey Stevenson: Oh well I am a labor and macroeconomist and I’ve spent a lot of time in economic policy as well. And what I’m really interested in is the choices people make about how to live their lives and how those choices are shaped by the opportunities that they have or don’t have. And so obviously the state of our economy, the state of economic policy, of social policy, all of those things shape people’s opportunities and their ability to make choices to live the best life they can.
Ian Cook: To live the best life. That’s a great mission, one we’re all chasing. So again, pulling on your expertise as an economist, the first thing I want to explore a little bit is we hear the word recession a lot and I know there’s a whole bunch of indices around how often the word is searched for, that give a sense of whether or not we are in recession. As an economist, can you give us a simple definition of what we mean by recession? Because I think there’s a lot of confusion even around that.
Betsey Stevenson: Yeah, so it’s actually a really easy question to answer and I can say really definitively that we’re not in the recession and that comes out of the definition. A recession is a period of declining economic activity. It means we’re shrinking in the amount of things that we’re producing, all the goods and services we’re producing. If we’re producing less today than we were producing yesterday and if we were producing less yesterday than we were the day before, we are in a period of declining economic activity. So this means actual declines, this doesn’t just mean slow downs.
And so I think some people have started thinking, well, slowing down means that we’re in a recession. No, that’s slowing down, but actual declines are what are meant by a recession. I think people also get a little confused about inflation must have something to do with a recession, but inflation doesn’t really have anything to do with a recession. We get inflation actually often because we are at a period of overproducing, in other words, we’re trying to consume more than we can possibly produce. And that’s certainly what we’re seeing in this inflationary period, is it looks like the economy’s running what the Fed would say, too hot, means we’re trying to produce more than we really can given our capacity. So not a recession, but definitely still a challenging economy.
Ian Cook: Yeah, definitely a challenging economy and I love the way you describe that. Inflation is often too much money chasing too few goods and so the price you can get for the too few goods goes up that drives up prices.
Betsey Stevenson: I’d like to actually, can I just, really because I think sometimes people think of money as just like an ephemeral thing and it’s wants, too many wants chasing too few goods. We want cars and there’s not enough of them. So how do we decide who’s going to get the cars or we want dishwashers and there’s not enough of them or we want doctor’s appointments and there’s just not enough doctors willing to take on patients. How do we allocate these things? And we often use money as a way to allocate them and what’s happening is a lot of families built up a lot of savings during the pandemic and they’re willing to dip into those savings to get access to these things that there’s just not quite enough of right now.
Ian Cook: Great. That’s a super informative way to go deeper on that. So why do people see recessions as negative? Because I mean exactly as you said, we’re not in a recession right now, there are indicators of slowdown and yet the fear and uncertainty and the conversation is all around the sky is falling, recession is happening. Why are people fear it so much?
Betsey Stevenson: Well so I think there’s two questions there. Why should you fear a recession? I mean, recessions are scary because recessions are times where we have a bunch of resources in the economy that we aren’t using. That’s if we start to decrease the amount we’re producing, well that means that we’re maybe not running all of our factories at capacity. But guess what’s one of the most important resources that we fail to use adequately in a recession? Human resources and that’s unemployment. So people, I think of every reason to fear unemployment. Unemployment is terrifying. It often has lifelong negative impacts on families, on communities, on the individual who becomes unemployed. The fear of being unemployed in a period with rising unemployment starts to shape people’s choices and decisions and their lives and how they experience them. So I think we have every reason to fear a recession.
I think there’s a subtly different question, which is why is everybody all upset and worried right now that we might have a recession? Why is there a particular fear right now of a recession when we’re not in one? And I think that’s because we see that we have rising prices and so we know something’s out of whack. We know that supply and demand are not in the happy place they should be with stable prices and roughly what we can produce is allocated to the people who value it at what it costs to produce it. And we’re in this sort of happy stable place. So what we are instead is we’re at a place with rising prices, which means that demand is outpacing supply and there not a lot of tools to fix that problem. It’s very hard for policymakers to increase supply.
That’s just not something they have a lot of leverage on, particularly in the short run. So what can they do? Well, they can try to bring down demand. So if the fact that we want more doctor’s appointments than there are doctor’s appointments to be had, then the goal is to get a bunch of people to stop wanting doctor’s appointments. Well that’s what markets are doing by raising prices, they’re trying to get you to stop wanting them by making them expensive. Instead what the Fed wants to do is make them expensive today relative to tomorrow by raising interest rates to try to hope that maybe that will dampen your desires for something today, push it into the future and therefore we’ll be able to meet today’s demand without rising prices. Similarly, if the federal government through fiscal policy wanted to try to address inflation, it would want to do it by trying to decrease demand.
The problem is when you’re trying to decrease demand, you could easily go too far and you could see a company find, hey these high interest rates have really meant a lot of customers aren’t showing up anymore. Not only should I not raise prices because it’s a bunch of customers not showing up, but I can’t even support the workers I have. Maybe I should lay some people off. So the fear is that our response to the inflationary period to stabilize prices to get us back to an equilibrium where supply equals demands with stable prices will require a set of policy actions that could potentially cause a recession because it’s really hard to get us exactly to the Goldilocks place where prices are no longer rising at higher than normal rates and we are exactly producing at capacity without having to decline.
Ian Cook: Yeah, that’s a pretty narrow target zone as you say. So that’s a good place to jump into the labor market component, which is again, as people who focus on humans, we’re very interested by that and because the indicators from the labor market are one of the ones that are often presented as, this is why we’re not in a recession or this is what’s making the management of this economic situation harder. Unemployment rate is still historically low, number of job openings still historically high. And I know you’ve also published a bit around what the labor market would’ve looked like had we not had COVID. It almost feels like COVID created an impact on the labor market which unsettled some of that equilibrium you were talking about. So if you were sitting in the seat you do advising an employer or employees around things to look at in the labor market, how you might interpret those indicators, what would you be paying attention to?
Betsey Stevenson: So there’s obviously a lot there in what you just asked. So the Fed looks at a period with very low unemployment, not that they hate people and want to see more of them unemployed, but out of a fear that employers would like to hire a lot more workers than there are workers to hire. And so what ends up happening in their fear scenario is that workers are competing with each other for the same too-small pool of workers and they just end up driving up wages as one employer tries to steal the workers from another employer because there aren’t any other workers to get. So he offers higher wages, steals the workers. Now the first guy’s like, “Great, I lost my workers, maybe I should try to offer even higher wages.” And then you get this bidding war because there’s just not enough people. And then the fear is that as wages go up, if you’re an employer and you have to pay more and more for your workers, eventually that’s got to show up in higher prices and that’s what’s called a wage price spiral.
So the fight over workers causes wages to go up quite rapidly in a way that gets fed through into prices and that phenomenon continues in what we see is ongoing inflation. Now, right now it does not look like our inflation was caused by any kind of wage price spiral. Instead inflation was caused by supply chain problems that had to do with durable goods and the fact that demand for everything recovered faster than supply chains could recover. But the fear is that if the labor market’s too tight, then what started as supply chain issues could easily take off and become wage price spiral, particularly with workers looking to change jobs because of inflation. They want those higher paychecks, so they’re desperately seeking the higher paychecks to make up for inflation. There’s not enough workers out there. And so they’re afraid that this wage price spiral will take off.
What would prevent the wage price spiral from taking off would be if employers are looking for lots of workers, lots of workers would show up. So if we saw labor force participation expand, if we saw immigration expand, if we saw more workers become available, then this means that even though there’s a lot of hiring, the hiring is actually new people coming into the labor market, not just employers stealing each other’s workers at higher and higher wages. And so we don’t need to see unemployment for its own sake and we definitely don’t even need to see hiring slow down. But what we do need to see is that the hiring reflects growth that is stable and sustainable growth of bringing workers into the labor force and bringing immigrants into the United States that allows the workforce to expand in a sustainable way that meets this high demand of employers. And that’s I think really important is that nobody’s looking to see people get hurt, but they do need to make sure that we don’t see a wage price spiral blow up.
Ian Cook: You make a great point there Betsey. A lot of people have been very focused on the tech layoffs that are currently washing through the press. What is often not included in those backstories is the extent of growth that those businesses took on through 2021. Many of them were like 20, 25% increases in headcount, now they’re cutting 10, 15%, but there like this notion of sustainable growth of the business. Very few organizations can add 25% headcount at a sustained basis. So really interesting to get that perspective about the timeframe and what a realistic rate of growth looks like.
Betsey Stevenson: I mean, I love that you went straight there because it is absolutely the case that the hiring that happened in that sector and in business and professional services more generally and in information services in the tech sector, this was just much more rapid growth since February 2020 than the three years prior. And if you’re growing at a faster rate during this pandemic period, I mean one thing we know for sure is that you can’t have that rate of growth continue, that’s not a sustainable ongoing rate of growth. And I think I mean, I’m still trying to wrap my head around what some of these folks in the tech sector were thinking because you actually saw Mark Zuckerberg say, “Oh I thought we were just in this new period of faster business growth forever.”
And I’m like, “Did you not understand we had a pandemic and that pushed a bunch of people into using technology that had never used technology before. And what you just did was pulled a bunch of your business from 2024, 2023, 2025 into 2020 and 21 and 22 and now you can’t get that business in 23, 24 and 25. So you’ve got for sure a slowdown because you stole from your own future.” And it’s okay to steal from your future. It’s better to have customers today than customers in the future, but you should not assume that that growth rate’s going to continue when what you’re clearly doing is pulling forward business by necessity. Lots of people turn to technology that may have taken years to convince to use it. So it is a peculiar industry right now.
Ian Cook: Again, I think I really appreciate the way you framed that up because it’s peculiar how they behaved. Often it’s seen as a kind of precursor to the rest of the economy, whereas it’s actually, it’s a unique aspect of the economy. I also really appreciate the way you talk about the time series of this information. This seems like a great place to go to break. When we come back, we’re going to talk about more broadly around layoffs and industries and how we might think about this over the next two to three years as we look at the potential for a recession. And on the impacts of that. Join us when we come back.
Producer: How to recession proof your business, recessions don’t last forever, just 12 to 15 months on average, which is still enough time to do major damage to your business. Sure you should prepare for a recession, but you also need to prepare to recover from one, download our guide, How To Recession Proof Your Business to learn how to make the best talent decisions now to come out of the storm unscattered, go to visier.com/podcast for the link.
Ian Cook: And we are back. I am Ian Cook, the host of the Human Truth Podcast from Visier. Today I’ve been joined by Betsey Stevenson, an economics and public policy professor at the University of Michigan. And we’ve been exploring the likelihood of a recession, what it means to the workforce, the labor market information and how that feeds into this understanding of the world we’re heading into. And that’s what I’d like to take the conversation next if I may, Betsey. If people are looking at the forecast for recession, if they’re understanding, we’re going to slow it down. They’re seeing the press commentary around layoffs, but then they’re thinking about their own industry as an employer or their own careers as an employee.
What indicators should people look at around labor market data? How do they help use those indicators to decide we’re in trouble, we’re good, or make appropriate judgements about this coming economic environment? We know it’s a slowdown, as you highlighted before, it may tip into recession because trying to hit a soft landing is really hard. We may continue with inflation because we don’t tighten enough. How do we read the indicators in the labor market to say, “Oh, it’s going to go well, it’s going to go badly.” What would be a sign for you that things are going to get better that are associated with the labor market?
Betsey Stevenson: So I think the first thing to realize is all economists look at multiple indicators. And anybody who says this is the one indicator I look at, I wouldn’t trust them because one indicator is, it can be a little bit informative, but two are better and three is even better. And that’s because there are two things. One is that data are noisy. So you can see GDP estimates in particular are quite noisy. I spent a long time in discussions with the media about why in our 2008 recession when we were in the middle of it, it looked like a lot more people had lost their jobs than in a normal recession. The job loss was enormous given the estimate of the magnitude of the decline in the economy. And so they were like, “Why are we getting this?” And I remember, I can see myself standing in the middle of my kitchen and talking to this reporter on the phone and saying, “Something’s not right.”
We’re going to learn the data are going to correct towards truth. And when we see something that’s an outlier like this, I think that that means that there’s something wrong in our measurement, not in our reality. And in fact later on we learned GDP had declined a lot more than our early estimates had suggested. And it was no longer a mystery why so many people had lost their jobs. So many people had lost their jobs because GDP had really declined. And GDP declining means our production of stuff, goods and services declined a lot. So you can look at GDP and you should and you should look at unemployment and labor force participation and you should look at the weekly layoffs data that comes out and you should look at the overall job openings and labor turnover data, but that comes with a much longer lag.
And you should look at things like consumer confidence and business confidence. And you should look at the components of GDP to see, well, is consumer spending doing okay? Is the volatility in GDP coming from what businesses are doing with their inventories or their investments or is this coming with where consumers are spending? Is this coming from shifts in imports or exports that might be being driven by broader phenomenon in the globe? So there are lots of different I think, indicators that you should look at. But right now, if what you really care about is how worried should I be about my industry, I can actually help you a little bit with some direct answers, which is, in the US the vast majority of our jobs, roughly 85% of our private sector jobs are in the service sector. Most things are services, even if you don’t think of them as a service.
So of course you think of somebody serving you a cup of coffee at a coffee shop as in the service sector, but lawyers in the service sector, an accountant in the service sector, an actor making movies in Hollywood is in the service sector making entertainment services. And of course, our biggest growing sector is actually education and health services in the private sector that accounted for a very large share of the nearly 15 million service jobs that were added between the last recession and the pandemic. And at the point of the pandemic, one in four women worked in education and health services in the private sector. So this isn’t public school teachers. So our service sector, and the second largest industry was education. And I know, sorry, our second largest industry was leisure and hospitality. We all know how badly leisure and hospitality got hit during the pandemic.
So we’ve got this service sector that used to be our engine of growth. In fact, in the goods producing sector, think about manufacturing making stuff, we still had about 800,000 fewer jobs as we went into the pandemic than we had had at the start of the 2008 recession. So that’s an industry not very big, even though you hear a lot of people talking about it, it’s not where a lot of the jobs are. It’s about 15%, but also it’s usually very slow to recover and it usually gets hit hardest by a recession. In the pandemic, it’s the service sector that got slammed. And we still haven’t added back all the jobs in leisure and hospitality and we’re struggling in health services. I mean, I think we need a reckoning with how we have treated our healthcare providers over the last three years because we can’t hire nurses.
We have a massive nurse shortage. So when you’re talking about the tech sector and I’m thinking about these layoffs and everybody’s boohooing about them, I’m thinking maybe we misallocated too many people to the tech sector and too few people to the healthcare sector. So I hope that some of those layoffs spur a movement to a place where we desperately are still trying to hire and there’s openings and there aren’t enough people to take those jobs. So all of that is to say that I think we could slip into a recession next month and we’re still going to have a nursing shortage, we’re still going to have a mental health provider shortage. We’re still going to have massive shortages in large parts of the service sector. Who’s going to get hammered if we move into a recession? Is going to be people in the goods producing sector.
We bought so much stuff and by stuff I literally mean things you can hold in your hands or park in your driveway or appliances you can run in your kitchen, sofas you can sit on, we bought all this stuff in 2020, 2021, we gorged ourselves on it. That’s normally the stuff we’d cut back on during a recession. And right now everybody is so full of new furniture and new appliances and new stuff that I think they’re going to cut back even harder than normal. So I think that that industry is quite, not fragile, but it faces quite a bit of risk in terms of a recession. And I think the service sector, I don’t think we’ll see any downturn in health services even if we had a big recession.
Ian Cook: And then the other key piece is typically how long does it take for a recession to wash through? Historically, how many months or how many years? We don’t live in recessions for huge amounts of time. So again, as an employer, employee yeah recessions tough times, there’s always a recovery. And how do people plan for the recovery as they’re going through the tough times?
Betsey Stevenson: Well, recessions tend to be short and sharp, but the expansions tend to be slow and gradual. So I mean, it can make sense if you’re an employer to hold on to people, but maybe not too many people because if you look at the 2008 recession, it took us many, many, many years to get back to where we were in 2008. So if you think you’re going to need somebody in five years, it might not make sense to hold onto them today. Now, what I do think is a little bit different right now is so many employers have laid off so many people in 2020 and 2021. I think they’ve both been reluctant and struggling to hire in many sectors. And it’s those sectors where I think if you’re an employer, it’s not a good time to let people go.
If you’re running a hospital, do not let anybody go even if we hit a recession. But the challenges are the sectors where they have filled themselves to the brim with employees. And that’s across the board in business and professional services, particularly high skilled work from home people, employment rates are pretty high. I mean, if you look at college graduates, unemployment is at a record low of below 2% and labor force participation rates of prime age college educated people are above where they were prior to the pandemic. And for college educated women, they’re at a new record high. So it feels like we’re pretty full of the college educated office worker right now, and that’s where I think you’re going to see significant slowdowns in hiring and perhaps even some layoffs like the kind we’re seeing in the tech sector.
Ian Cook: Yeah, that’s great advice. Very comprehensive view of the, and again, the notion to not just read the press headlines, but think about it from the perspective of the work you do, the business you do, how your business makes revenue, some really interesting insights there around the change depending on the kind of work that’s being done. Building on what you’re saying, Betsey, we had a Matt Siegelmen on a recent podcast and he was talking about the American opportunity and how we’re moving away from that focus on degree, how we’re moving away to a skills based view so that we’re broadening out access to work, which I think is part of the adjustment in the labor market that I personally sense is happening to a degree through this next wave. So it’s been fascinating Betsey. Thank you so much for joining us. Making sense of economics, which again, often very cyclical, often very much a case of reading multiple different inputs and then trying to make a balanced view on what that is, as you say, trying to find the equilibrium.
Hopefully some good insights for employers out there. Recessions are short and sharp, so don’t plan for the next five years as though the next three months is going to be like the home way. Also, I think interesting for people in that employed basis, understanding the sectors and the kind of work you can do to keep in a work environment that is supportive, as you say healthcare is, we know we have a bunch of healthcare clients like crying out right now for people to help support that work on a range of different places. So whilst others slow down, other areas grow, it’s a constant balancing game. So appreciate everything that you’ve shared with us. Hopefully a lot of good guidance for our listeners. And I’m going to say to our listeners, thanks for listening today. This is the Human Truth Podcast and we’ve been talking about labor market and what it tells us about a recession. Thanks again to our guest, Dr. Betsey Stevenson, and I’m your host, Ian Cook will be back next time, discussing another fascinating workforce statistic. Thanks for listening.
Producer: Thanks for joining this episode on the Human Truth Podcast presented by Visier. More links and information presented on today’s show are at visier.com/podcast. Subscribe wherever you listen to your podcasts. The Human Truth Podcast is brought to you by visier, the global leader in people analytics, whose mission is to reveal the human truth that helps businesses and employees win together. Today’s episode was produced by Grace Shepherd with technical production by Gabriel Kava. Sarah Gonzalez is our head of content and Ian Cook is our host. See you next time and until then, visit us at visier.com/podcast.
