Why We Expect the Job Market’s Slowdown to Renew in 2024

The job market is steadily returning to its prepandemic self.

Although the slowdown in job growth paused in the second half of 2023, we expect it to renew as 2024 unfolds. In our latest Economic Outlook, we detail that we expect real gross domestic product growth to slow in 2024 versus the solid 2.5% growth posted in 2023. We expect GDP growth in year-over-year terms to dip to around 1% by the end of 2024.

Slowing GDP growth in 2024 will compel firms to slow hiring in order to avoid deteriorating profits. As economic growth reaccelerates over 2025-26, we expect a resumption of the labor market recovery to follow.

After a temporary uptick over 2024-25, we expect unemployment in 2028 to reach 3.5%, right where it was before the pandemic. We forecast that labor force participation will recover ahead of prepandemic rates as widespread job availability pulls in formerly discouraged workers.

Downtrend in US Job Growth Has Paused Temporarily

Nonfarm payroll employment growth was 2.0% annualized in the three months ended February 2024, with about 275,000 jobs added in February. This is a significant acceleration from 1.5% in the prior three months and a bit higher than the 1.7% average annual growth from 2015 through 2019.

Nonfarm Payroll Employment, % Growth (Annualized)

Here’s a timeline for how we see the job market will unfold in 2024:

• For now, the downtrend in employment since the beginning of 2022 may have temporarily abated. The trend that started in mid-2021 has paused temporarily, which is not surprising given the strength of gross domestic product growth in recent quarters. However, we expect the slowdown will resume in the first half of 2024 as GDP growth slows.
• But eventually, firms will look to cut labor usage, or billable employee hours. Firms have already started to cut down on hours per worker, which declined by more than 0.6% year over year in the first six months of 2023. We expect the cutting of hours to serve as a precursor to a slower pace of total job gains. Temporary-help employment has also been declining over the past year, a metric that often is a harbinger of more widespread job-cutting.

Labor Force Participation Still Lags Prepandemic Rates

The employed share of the adult population is slightly above 60%, which is still down about 1% from where it was before the pandemic.

The unemployment rate has about fully recovered, averaging 3.8% in the three months ended in February 2024, versus about 3.5% before the pandemic. Thus, the remaining shortfall in employment rates is due almost entirely to lower labor force participation. The labor force includes all people who are employed or officially unemployed (actively looking for work); when people no longer fall into one of those two categories, they’re counted as not in the labor force.

Employment-Population Ratio, % Cumulative Change vs. January 2020

The lingering shortfall in labor force participation appears to be primarily driven by people age 55 and older, who ended up retiring early during the pandemic (and are unlikely to reenter the workforce). Whereas among 25- to 54-year-olds, the participation rate has actually slightly surpassed prepandemic levels.

We expect labor force participation among older Americans to recover gradually over the next several years, though the impact of excess retirements will provide an enduring drag.

Job Growth by Industry in 2024

While job gains are holding firm, the labor market is still cooling off to a great degree because of expansion in labor supply (relative to demand).

Employment by Industry Group, % Growth (Annualized)

Here’s where employment stands by industry:

• Healthcare and leisure: Hiring in these areas still accounts for a large share of aggregate job gains. Employment in these industries soared in the beginning of 2023 as people resumed certain doctors’ appointments and types of entertainment they may have avoided during the pandemic. However, as healthcare employment now exceeds prepandemic levels and those activity levels are pretty much back to where they were before the pandemic, employment is leveling off. Healthcare employment maintained at a 3.4% annualized growth rate in the three months ended in February 2024, but it’s already a marked decrease compared with a year ago.
• Government: Though job growth in government accelerated in recent months, it is similar to the situation in healthcare and leisure, where the process of catching up with pandemic-era losses is now mostly complete, so future gains should be slow.
• Construction and real estate: Employment growth in these industries continues to hover between 2.5% and 3.0%, though we maintain that the increase we saw (which started in the second half of 2023) will be short-lived. That appeared to be driven by the factory-building boom and a partial rebound in housing. We anticipate that the housing downturn will resume and drive construction employment lower over the next year.
• Retail and transportation: Comparatively, employment growth in these industries has stagnated in line with consumer goods demand, which has also weighed on manufacturing.
• Other services: This category, which comprises most types of “white-collar” jobs, has rebounded recently. Firms had been cutting these jobs in a general program of belt-tightening over the past year. Rising equity prices may be encouraging a rebound in corporate hiring.

Wage Growth: Where It Stands and What We Expect in 2024

Key takeaways about wage growth include:

• Private hourly wage growth averaged a 4.0% annualized rate in the past three months. This is an increase from 3.8% over the previous three months. The year-over-year growth rate decreased slightly to 4.3% as of February and was down markedly from a high of 5.9% in March 2022. This is slightly above the 3.5% consistent with the Fed’s 2.0% inflation target.
• Wage growth should continue to slow in 2024. Workers may currently be seeking a one-time catch-up in wages in response to the unexpectedly high inflation that occurred in 2022 (which caused average inflation-adjusted wages to fall). But this effect should normalize in 2024 as labor demand curtails.
• The job openings rate also fell significantly. From its record 7.3% in early 2022, the job openings rate was down to an average of 5.3% in the first quarter of 2024. While we don’t weight this as heavily as a driver of excessive wage growth as some do, it’s still encouraging that openings are normalizing.

While private hourly wages receive most of the attention, there are several independent data series that can be used to gauge wage growth. As shown below, we took an average of the four main measures of wage growth.

The composite measure showed wage growth of 4.6% year over year in fourth-quarter 2023, down 150 basis points from its peak in early 2022. Assuming productivity growth of 1.5% and a constant labor share of GDP, this is consistent with inflation running at 3.1%, close to the normal rate (and the Fed’s target) of 2.0%.

Wage Growth Measures, % Year Over Year

Labor Force Participation in 2024 and Beyond

In the near term, we expect slowing economic growth to cause the unemployment rate to rise to 4.0% on average in 2024 (peaking at 4.3% in the fourth quarter of 2024) from an average of 3.7% in 2023, which is quite mild compared with US economic slowdowns in recent decades.

Labor Market Forecasts

As economic growth reaccelerates over the next couple of years, we expect the labor market recovery to resume, with the unemployment rate falling back.

We remain upbeat on labor force participation gains. Although the gains we expect after 2024 look modest, they’re actually quite optimistic when you consider aging demographics.

We expect that widespread job availability and healthy wage growth will draw marginal participants back into the workforce (that is, people who are available to work but aren’t actively job-hunting). This process was already happening in the years before the pandemic, as labor force participation was greatly outperforming the rate expected based on demographics.

We’re seeing early signs of this—for example, employers dropping unnecessary degree requirements from job postings and an increased willingness to train workers for skilled tasks. We see no reason that this trend won’t continue in the coming years.

This article was compiled by Emelia Fredlick and Yuyang Zhang.