November Jobs Report Preview: Cracks in the Labor Market Showing?

As we near the end of 2023, the word that best describes the labor market through the year is resilient. Despite entering the year with fears of recession, the labor market has continued to drive strong job gains throughout the year. However, the labor market has not been able to avoid slowing and risks heading in 2024 are still visible on the horizon as unemployment creeps up and concerns about a hard landing persist. If resilience was the theme for 2023, it remains to be seen if that theme will persist into 2024.

Here are three trends we'll be watching for in the November jobs report:

Why is Unemployment on the Rise?

The unemployment rate has increased moderately this year, rising from 3.4 percent in April to 3.9 percent in October. While 3.9 percent is a historically strong unemployment rate, the increase is a concern given that the unemployment rate is often used as an indicator of recession. The unemployment rate is not yet triggering the popular Sahm Rule, but further increases risk signaling an impending recession.

Where is the increase in unemployment coming from? Looking at labor force flows data suggests that the rise in unemployment is not due to a rise in layoffs which remain near historically low levels, but instead a modest slowdown in unemployed workers finding jobs and more workers staying in or reentering the job hunt (i.e., staying in the labor force), rather than giving up.

The flow of workers from “Not in Labor Force” to “Unemployed” rose to 1.8 percent in October compared to 1.6 percent at the start of the year. Similarly, the opposing flow of workers from “Unemployed” to “Not in Labor Force” fell to 23.2 percent from 25.1 percent at the start of 2023. Usually, workers move from “Not in Labor Force” into “Unemployed” when the labor market is softening because there are fewer jobs to allow workers to jump straight from out of the labor force into employment. Similarly, outflows from “Unemployed” to “Not in Labor Force” can fall when the labor market softens and workers are unwilling or unable to give up on looking for a job.

The flow of workers from “Employed” to “Unemployed” has not changed much over the last year, suggesting that while layoffs have been in the headlines, they have remained relatively small or workers have been able to find a new job without an unemployment spell.

However, the flow of workers from “Unemployed” to “Employed” has slowed in the last year as unemployed workers are having a harder time finding work. If the rate of unemployed workers finding jobs had not decreased over the last year, an additional 677,000 workers would have found jobs, lowering the unemployment rate from 3.9 to 3.7 percent.

This is an important reminder that while attention around a weak job market is often focused on layoffs, one of the important costs of recessions is reduced hiring demand locking workers (especially new grads, the recently laid off, returning parents, etc.) out of a new job.