Even a cooler labor market will likely remain hot

With runaway inflation and the world’s central banks raising interest rates, 2022 is providing a complex backdrop for projecting near-term labor markets. On one hand, one has to assume the Fed will be at least somewhat successful in its goal of cooling demand sufficiently to ease inflation, and some increase in unemployment will almost certainly be collateral damage. Indeed, in the technology world, there have already been several high-profile announcements of hiring freezes and layoffs. On the other hand, the number of unemployed workers per job opening remains at multi-decade lows (see Table 1), and many companies to whom we’ve spoken that aren’t facing capital constraints or demand decreases continue to find it challenging to fill needed roles.

While we expect the labor market to cool from its recent torrid levels, the fundamentals underpinning the long-term war for talent aren’t going away anytime soon. Fewer people in the United States are graduating from college (with a noteworthy downturn during the pandemic), and the baby boom generation will retire in increasing numbers. Digital transformation is exacerbating the effect of these demographic changes, turning a greater share of the labor market into jobs that require at least some digital skills. Research from the Brookings Institution shows the percentage of jobs requiring low digital skills decreased from 56% in 2002 to 30% in 2016, while the percentage requiring high- or medium-level digital skills increased from 45% to 70%: a trend we believe has persisted as the pace of technological change remains rapid. As such, we believe that though there may be cyclical perturbations, secular underlying demand for skilled workers will continue to grow.