Today’s Labor Market Trends, with SHRM Economist Justin Ladner

Mo Fathelbab:

Welcome to today's episode of People and Strategy. I'm your host, Mo Fathelbab, President of International Facilitators Organization. People and Strategy is a podcast from the SHRM Executive Network, the premier network of executives in the field of human resources. Each week we bring you in-depth conversations with the country's top HR executives and thought leaders. For today's conversation, I'm excited to be joined by Justin Ladner, SHRM Senior Labor Economist. Welcome Justin.

Justin Ladner:

Thank you, Mo. It's great to join the podcast today.

Mo Fathelbab:

Thank you, Justin. So you are the Senior Economist at SHRM. Tell us about your education and the career path that has led you to SHRM.

Justin Ladner:

Yeah, so I've only been at SHRM now since April of 2024, so I'm new. It's been a very exciting time. So I'm an economist, as you mentioned. In terms of my background in education, I went to graduate school at the University of Michigan, finished up there in 2015 and came out to DC, joined a think tank. It's actually technically called a Federally Funded Research and Development Center. The government loves acronyms so FFRDC, but it's called CNA, and basically that company works for the military mostly in doing different types of research. And I worked in military manpower and personnel policy research. From there, I worked there for about six and a half years. I moved to AARP late 2021, and I worked on their longevity economy research. So it's basically sort of understanding the economic contributions of people 50 and older. I worked there for a little bit over two years, and then I joined SHRM in 2024. And yeah, it's been very, very exciting time.

Mo Fathelbab:

Wonderful, wonderful. So Justin, you wrote an excellent article on the topic of the US labor market and inflation in the fall edition of SHRM's Executive Network People + Strategy Journal. I want to ask you a few questions about that. First, what is the current status of the labor market?

Justin Ladner:

Well, 2024 has been a really interesting year, and really the period from the start of pandemic to the present has been pretty unprecedented in many ways in US history. So the 2021 to 2023 period was this sort of unprecedentedly hot labor market where the number of job postings exceeded the number of unemployed people by a huge margin, by millions and millions of people. Basically, it was very hard for employers across almost every industry to find workers. There was a lot of obviously other economic issues going on. So it's been a very unusual period, and so 2024, in many ways entering the year, it was still extremely hot labor market, still millions more job openings than unemployed people in a given month. So a big labor shortage basically. And it was a year where a lot of people were wondering, would we see a return to normalcy basically.

I mean, I think the expectation was that the labor market would continue to be very tight, but there was a question of whether or not we'd see something that was more akin to a standard tight labor market, something that existed right before the pandemic, for example. And broadly speaking, I mean, there've been some mixed signals. We've had things go in different directions. We've had some months with very, very strong job reports, stronger than expected employment growth, other months that came in below expectations. But broadly speaking, the labor shortage has eased a bit, particularly in certain industries. It still remains a hot labor market overall. There are still more job openings in the average months, and there are unemployed people, meaning that even if we could find a job for every unemployed person, there would still be unfilled openings. So basically labor demand is exceeding supply at the moment.

So it still remains a very hot labor market, but it's cooled significantly relative to conditions, let's say a couple years ago. And in particular sectors, it's cooled off quite a bit. Tech would be a very notable example. There was sort of a big hiring boom in tech in 2021, 2022. That has really collapsed. There were a lot of kind of reports of layoffs, especially in 2023, continue in 2024. So that industry industry's cooled off quite a bit. But other industries like healthcare remains very, very strong. Hiring is very strong in healthcare, construction remains strong. So overall it remains a very tight labor market, but something that's more typical. Actually in a lot of ways, pretty similar to what the labor market looked like immediately before the pandemic, so 2019 era.

Mo Fathelbab:

Yeah. So Justin, your People + Strategy article also mentioned that the country's facing some long-term shortage of workers because of some key demographic trends. Can you talk about that for a minute?

Justin Ladner:

Yeah, so basically one of the big challenges that the labor market is facing or that the US workforce is facing in general is just population aging. So over time, people, life expectancy has gone up, people are living longer, and also fertility rates have gone down. And the net effect of that is basically that we have a shift in the age distribution of the US population that's favoring age groups that have lower labor force participation rates. So the fraction of people that are 65 and older, for example, their representation in the US population, the fraction of the US population that they make up has increased significantly over time. It's projected to continue increasing in the future. And basically that means that the set of people, the population of people that are working age and especially prime working age, that would be people 25 to 54 is shrinking relative to the population at large.

And that creates a challenge because basically we have a smaller population to draw from in terms of the people that are going to have very high labor force detachment, people are going to be filling most jobs. So over time, a big challenge because of population aging is how do we find workers? And the way to, I mean, the solution to that, there are many levers that you could imagine using, but it does represent a challenge because over time the set of people that are working age is falling all else equal.

Mo Fathelbab:

Yeah. So let's talk about some of those potential paths forward that you outlined in the article. What are some of those solutions?

Justin Ladner:

Yeah, so traditionally there are a few different ways that you could tackle a problem like this. Historically, immigration has been a key issue. The vast majority of people that immigrate to the United States are working age, especially prime working age. Generally speaking, the motivation for migrating in the first place is to work. So labor force participation among migrants is very, very high relative to the population at large. And so that's a key lever going forward would be efficient and obviously legal immigration to the United States as a way of increasing the population of people that are working age, but there are other solutions as well. So another lever that has a lot of potential would be the idea of trying to tap into previously untapped talent pools or increasing labor force participation among groups that have seen a fall. So a couple of good examples would be the 65 plus population. Leading up to the pandemic labor force participation in that group had basically been growing almost uninterruptedly for about 30 years, since the early 1990s.

The people at 65 and over had gone from being basically a very, very small part of the labor force to still a small part of labor force, but much, much more important than they had previously been. Now, the pandemic had a big effect on that, that decreased labor force participation among people 65 and over. And that has not yet recovered, although more recently it's showing a little bit of sign of recovery. It still remains a couple of percentage points below what it was before the pandemic, but policies and practices that encourage increased labor force participation among that age group would be a key way of increasing the overall labor force going forward. For a couple of reasons. The one big reason is that the 65 plus population is going to grow a lot in future years. So even small gains in labor force participation among that age group translate into hundreds of thousands of additional workers.

So programs that encourage labor force participation among that group would include things like reskilling and upskilling programs to help people maintain their competitiveness, keep skills that are relevant in the labor market as they age. That kind of policy is really relevant for people of any age, but it ends up being particularly important for older workers. It helps them stay in the labor force, it helps them switch jobs if they want to do that. It basically keeps them competitive. Similarly, another age group where we could see a lot of improvement would be the youngest working age, age group, people 16 to 24 as an example. Over time, if I go back to let's say the 1990s, labor force participation in that group was much, much higher than it is today, about 10 percentage points higher at the turn of the century relative to where it is now.

Some of that is because people 16 to 24 are more likely to be college students now, and obviously that's an investment that's going to pay off in their future. That's not a problem. College attendance is a good thing and it's a good investment for somebody in their career. However, even if I just eliminate the population, if I focus on people aged 16 to 24 that are not students, I actually find that labor force participation among that group has fallen and almost exclusively that's been because of falling labor force participation among non-student males, aged 16 to 24. And that drop is significant because it means that there are literally millions fewer labor force participants than there otherwise would be if we had participation levels that were akin to where they were around the turn of the century.

So encouraging labor force participation among that age group would be another way of increasing the overall size of the labor force, and it also would have the benefit of setting people up for a more successful career path. A big issue with a lot of young workers or a lot of young people is that they simply don't have the skill sets that make them competitive in the modern labor force. So ways to achieve that would be increased vocational training programs, increased access to apprenticeships, things that give people practical skills so that they can enter the labor force early and with a competitive sort of successful skill set that sets them up for success in the future.

Mo Fathelbab:

So great, great, great thoughts. What about the role of AI and automation? What role can they play in resolving these workforce changes?

Justin Ladner:

That's a great question. I think it's a really hard one to answer definitively. I would say that there's, maybe this is so oversimplification, but there could be about two kind of camps into how we think about AI. One camp might be that AI is, or one sort of thought process would be that AI is like any other technological change we've gone through in the past. So we've talked about technology replacing workers for a long, long time going back certainly through the industrial revolution and even before. And historically, big technological innovations have destroyed some jobs. They've created new jobs and they've augmented existing labor. Generally speaking, the net effect of that has been to increase the overall demand for workers. So over time, we found that technological innovation is not basically a death knell for employment. It's certainly made some skills obsolete, but it's also created new demand and it's also made a lot of other jobs, a lot of existing jobs more productive.

So one sort of take would be that AI is going to be just another example of that and that we'll see a net increase in demand for employment, just it'll be different types of skills than what is currently the case. We're already seeing a little bit of that. We all have access to AI tools that we use to automate certain tasks. A lot of them are sort of aimed at just making people more productive rather than replacing them entirely. But going forward, I would definitely say that there are going to be some skill sets that will likely be entirely replaced by automation.

The other sort of camp would be that AI represents a much more fundamental change, that it's going to wholesale replace workers in a wide variety of categories, and that that replacement will not be offset by gains in other areas. It's very difficult to predict. But I mean, I think one clear takeaway is that AI tools are going to be part of the solution to solving the labor shortage in that we have a pretty clear understanding that they're going to be able to replace some skill sets, whether or not the breadth of that replacement, I think is an open question.

Mo Fathelbab:

Yeah. Okay. So we've talked about automation and AI. We've talked about the 18 to 24 age group of males specifically, we've talked about the 65 and older. What other potential pools of labor might there exist for people to tap into?

Justin Ladner:

Yeah, I mean, that's a great question. We've also talked about immigration as being a key labor pool tap into. Other untapped talent pools that the SHRM Foundation, for example, has emphasized would be formerly incarcerated people as an additional source of labor. Again, I think one key issue is, I mean, even among people that are prime working age, I guess one other thing that I would point out is that overall labor force participation among males of any age, except for people 65 and over, has been falling for quite some time. So if I looked at overall male labor force participation since the 1950s, since basically the middle of the 20th century, that participation rate has been falling. Now that's a complicated thing. I mean, there are several reasons for that. One reason is that labor force participation is a household decision in lots of contexts. So is the labor force participation of women has increased, that has been offset in some sense by a decrease in male labor force participation.

I mean, different types of household arrangements have evolved. So there are stay at home dads now. That's something that happens fairly regularly where that would've been pretty unusual in the past. So there are things, there sort of, these decisions can be optimal and it's not necessarily the case that labor force participation always has to be rising for a particular group, but I think you could make the argument that labor force participation among males, particularly young males, as I already mentioned, has been falling for some reasons that are not necessarily good. And so strategies aimed at basically making sure that every age group in the population, every demographic in the population has a competitive skill set or has access to the tools they need to attain a competitive skill set that would broadly speaking, be a good strategy maximizing the possible size of labor force.

Mo Fathelbab:

All right, thank you Justin. Let's shift gears a little bit because a lot of the conversation today is about interest rates and inflation. What are you seeing right now?

Justin Ladner:

Yeah, so I mean this has been a big topic for several years now, really dating back to 2021 and 2022, we had this huge inflationary bubble, a lot of different reasons for that. There were a lot of really unprecedented supply chain issues that I'm sure everyone has heard about. There was obviously a big federal spending that all surrounded the pandemic. Lots of different factors really contributed to this inflationary bubble. And the Fed's response to that was the classical response of raising interest rates. Basically the idea is we raise interest rates as a way to suppress aggregate demand for goods and services by making investment more expensive, by making consumer spending more expensive. So the idea is we raise interest rates in order to try to combat inflation. It's a necessary policy in the long run, but it is also a risky policy because when you do that, when you raise interest rates to sort of depress economic activity, you run the risk of basically putting the economy into a recession.

And that was a concern for a long time. There was a lot of discussion, I'm sure everyone's heard the term soft landing, basically that the idea is the goal of how can we solve the inflation crisis without sending the economy into a recession? So can we achieve that soft landing, basically a return of inflation to normal without incurring a recession. So there was a lot of anxiety about that. Now heading into 2024, I think there was a lot of tension about what the Fed was going to do because interest rates had been elevated for some time, and the thing is the Fed was able to get away with it because the economy in general and the labor market in particular had proven to be very, very resilient during this period. So the US economy had been doing quite well, certainly relative to pure economies around the world.

The labor force continued to be extremely hot. There was still very, very healthy demand for labor, especially relative to supply. So the economy was actually humming along at a good pace on average, despite the fact that we had these high interest rates. However, entering 2024, we started to get some mixed signals about more depressed economic activity. So start of the year, the labor market still appeared to be very, very strong. In fact, there was a couple of indications of potential return of inflation. I think, if I'm recalling correctly, the first quarter Employer Cost Index came in a little bit above expectations, which led to some fears about wage inflation. However, over the summer and leading into the fall, we started to get very consistent evidence that inflation was cooling, that the labor market itself was also cooling. And that has, I think, given a lot more clarity to what the Fed's likely response is going to be heading forward.

So June, July, August, we had three consecutive job reports that came in below expectations and that were weak relative to what they had been in previous months. And so that led to this concern that the labor market was actually cooling a little bit too fast. And the Fed responded in September with its first rate cut. It was a 50 basis point, half percentage point rate cut, largest since 2009. And the widespread belief is that the Fed is now going to pursue a policy of sort of steady cuts for the remainder of 2024 and heading into 2025. So kind of trying to gradually return the interest rate to a more typical level, not to the rates that we were seeing at the beginning of the pandemic where the interest rate was effectively close to zero, but to more sort of normal rates. So basically it appears that the soft landing has actually succeeded.

So we've not gone into recession. Inflation is now back to basically right in the target range of where the Fed would like it to be. Personal consumption expenditure inflation, that rate year over year is, the most recent data I think had it at, I want to say 2.2% if I'm remembering correctly, it was August of 2024. And that's right close to the Fed's 2% target. So basically inflation is largely returned to where it's viewed as being kind of a healthy value and the overall economy still appears to be pretty strong. The labor markets had a great jobs report in September of 2024 that just came out, I think last week. And the economy added 250,000 jobs, which was way above analysts expectations. So basically it appears as though we have achieved a return to sort of normalcy with respect to inflation while still maintaining a healthy economy.

Mo Fathelbab:

So it sounds like you see the interest rates continuing to decline in 2025. Yes and no. And then of course, where do you see inflation going in 2025?

Justin Ladner:

So I would say that right now, certainly the expectation, I mean there's always shocks that can change the landscape, but right now the expectation is that the interest rates will steadily decline probably throughout 2025, as long as there's no sort of signs of any kind of crisis or return of inflation or anything like that. In terms of where inflation will head, it'll probably stay right around where it currently is. As interest rates lower, that's going to encourage greater consumer spending. That's going to encourage greater investment. Basically, it's going to push up all else equal aggregate demand for goods and services. And what we would expect that to do would be to put some upward pressure on inflation. Now, the Fed would likely pursue a very gradual policy to avoid any return of high inflation. So I would expect inflation to stay roughly around where it currently is as the fed gradually lowers rates over the next, let's say 18 months or so.

Mo Fathelbab:

All right, so let's shift to another important topic, and that is tariffs. So maybe give us a simple basic education as to the impact of tariffs on economy, on businesses, etc.

Justin Ladner:

Yeah, so I wish I had a whiteboard that we could turn to to kind of do a little supply and demand graph, but the basic idea with tariffs is you are putting effectively a tax on an imported good or service, and that is raising the price of that. Now, the incidence of tariffs, who's paying the tariff is basically on the domestic side. So in the simple sort of supply and demand world, what a tariff does is it makes a good or service more expensive for a domestic consumer.

And that's because if I'm buying it from abroad, I now have to pay this additional tax on that good or service. It benefits domestic producers of that good or service because it increases the price of which they can sell their good or service and be competitive. So for example, if I had a tariff on cars from foreign producers, that would benefit American car makers because it means that they can charge a higher price for their good or service and still be competitive with their foreign counterparts, but it makes consumers worse off all else equal, domestic consumers worse off because they're paying a higher price than they otherwise would.

Mo Fathelbab:

Does that contribute to inflation?

Justin Ladner:

Well, it could. It sort of depends. I mean, overall, it depends on the sort of extent. If everything had a tariff on it, that could be obviously very significant. I mean, the fact of the matter is most goods or services in the United States are domestic goods and services. So imports are important, but they're actually a relatively small part of the overall economy. We all buy things that are produced in foreign countries, but just day-to-day, if we think about the goods and services that we use on a daily basis, certainly a lot of them come from foreign countries, but actually most of them are domestic. So the key issue with tariffs though is that they definitely have some negative consequences for consumer, for domestic consumers especially. There are, however, in the long run, there can be specifications for why you might have a tariff. So for example, one big outcome of the pandemic was this realization that we have a lot of exposure to very fragile global supply chains.

And so one issue with relying on foreign producers of goods and services is that if some huge shock comes along like a pandemic or a geopolitical conflict, we can all of a sudden not have access to a good or service that we really rely on very, very heavily. So one argument in favor of a sort of selective tariff that's targeted at a very sort of important good or service would be that it's important to produce that service or good domestically because in the event of a shock, we can actually insulate ourselves from that. A great example, this is not a tariff necessarily, but the CHIPS Act is all about encouraging domestic production of semiconductors among a few other things. It's not specifically a tariff, but it effectively is making it cheaper for producers to produce domestically. That would include actual US firms producing chips like Intel, but it also includes foreign firms that would have manufacturing facilities on US soil.

The whole sort of motivation behind that act was this realization that in the pandemic we had this sudden kind of cutoff of supply of chips because it relied on complicated global supply chains that were really, really disrupted by the pandemic and a number of other things. So it's a strategic asset. Chips are incredibly important to a lot of what we do on a day-to basis. So encouraging their domestic production actually has a very strong justification. So that would be one reason to use tariffs.

I mean, another reason to use tariffs would be if a global supply chain or if a good service that is being imported created geopolitical tensions or was for whatever reason, not politically sustainable. So for example, if there was a good or service that was provided exclusively from an economy that was for whatever reason, not getting along with the US or had some other conflict that was important for US interests, that would be another justification for a tariff. And I think broadly speaking, there's widespread agreement that it doesn't make sense to have sweeping tariffs on basically anything that's imported, but you can make arguments for specific goods or services for some of the reasons that I just outlined.

Mo Fathelbab:

Great. Great. Thank you for breaking that down for us. Let's talk about tax hikes. How do they impact different demographics of the workforce?

Justin Ladner:

So that's a great question. It's an expansive question. So it depends on what types of taxes we're talking about, right? So we always talking about income taxes as an example. When people think about tax hikes, I think they're usually thinking about income taxes. The general idea with changes in income taxes is that when you increase an income tax, you're basically sapping away money that people would otherwise be spending. However, the effect of that sort of depends on who is paying the tax. So if you increase income taxes on kind of lower income people or middle income people, what that would largely translate to would be less spending by that group because most of the money earned by that group ends up being spent. So if I tax them more, then their spending will decline.

Now that spending might in some ways be offset by increased government spending from taxes. But generally speaking, if a tax is falling more on working class or middle class people, that's going to translate into reduced spending by that group. For higher income people, particularly millionaires, billionaires, the effect of an increase in income tax on that population could be very different. That could translate more into a decrease in savings among that group because the people that are in that tax bracket or they're in that income level are not spending their entire income. There's a much higher propensity to save. So increasing taxes on that group could have a different effect, mostly operating through reduced savings rather than reduced spending.

Now, there's other types of tax increases. Right. So I mean a tariff, one way of thinking about a tariff is that it's a tax in a particular market for the good or service where the tariff is being imposed. Those are distortionary taxes in the sense that they move a market away from its sort of unregulated perfect equilibrium. So that's a different kind of tax, and that would be like a sales tax, for example. Increasing a sales tax would change the market equilibrium for goods of services that are subject to that sales tax.

Mo Fathelbab:

Amazing. Justin, thank you for this incredible lesson in economics. What is one piece of advice that you received that shaped your work or your life?

Justin Ladner:

Oh, wow. Yeah, that's a great question. I've been very fortunate. I've received a lot of good advice over the years. I've been smart enough to follow some of it, but I think, I'm not sure if this qualifies as advice, but when I finished graduate school, I mentioned I went to CNA and I think it was during the interview process. I was talking to the head of the division and they were really talking about how, so I'm an economist. Coming from an academic background, you're used to spending your entire day in that department speaking with other people that are trained to be economists. And that can be a very siloed kind of environment where we're all thinking the same way. We're all kind of using the same approaches to solve problems or to answer questions.

And when I was in this interview and I was talking to the head of the division, they were really emphasizing this idea that they had at that organization, they had economists, they had political scientists, they had sociologists, they actually had chemists, physicists, they had, as I mentioned, we worked a lot with the military. So we actually had a lot of military service members who we were working with. Basically, it was this very eclectic, very diverse group. People with lots of different education backgrounds, lots of different training backgrounds. And the head of the division was really touting the value that that brought, and I really learned as I actually started working, and I've had great fortune at CNA, at AARP, and now at SHRM to work with these really diverse groups.

And I basically learned that that's a great way to develop better solutions to problems, to think about research in a more eclectic, more kind of non-siloed way where people have different perspectives. I think that really helps get to the best possible solution in the most efficient way. So that I think has been a really big boon to my career, is that initial insight that came from that interview.

Mo Fathelbab:

Thank you, Justin. And that's where we'll end it for this episode of People and Strategy. A huge thanks again to Justin Ladner, Senior Labor Economist at SHRM. You can follow People and Strategy podcast wherever you get your podcasts. Also, podcast reviews have a real impact on a podcast visibility. So if you enjoyed today's episode, leave a review to help others find the show. Finally, you can find all our episodes on our website at SHRM.org/podcasts. Thank you for listening, and have a great day.