Labor Market Tightness after the COVID-19 Recession: Differences across Industries

In assessing the likelihood of a soft landing for the U.S. economy when raising interest rates to curb inflation, policymakers pay close attention to labor market tightness, measured as the number of job vacancies divided by the level of unemployment. This ratio tells us how many job vacancies are available for each unemployed person in the labor market. When the ratio is high, the number of job vacancies is large relative to the number of unemployed people. That is, job openings are plentiful. In economic terms, the labor market is said to be “tight.” On the other hand, when the ratio is low, the number of unemployed people is large relative to job vacancies and the labor market is said to be “slack.” That is, there are plenty of available workers, but not enough jobs to go around.

Not only will aggregate labor market tightness vary over time, but industry-specific tightness does as well. Our analysis breaks down labor market tightness in the COVID-19 period by industry, determines which industries contributed most to aggregate labor market tightness, and examines why accounting for differences among industries—such as in labor productivity—could play an important role in identifying labor shortages.

Labor Market Tightness in the Recovery from the COVID-19 Recession

The following figure plots tightness for the U.S. labor market between December 2000 and August 2023, the earliest and latest dates at the time of our writing for which job openings data were available from the Job Openings and Labor Turnover Survey (JOLTS) conducted by the Bureau of Labor Statistics (BLS). We obtained unemployment levels from labor force statistics in the Current Population Survey (CPS), which is conducted by the U.S. Census Bureau for the BLS.

Focusing on the COVID-19 period, we see that after a sharp drop in April 2020 because of a spike in unemployment, tightness quickly rebounded and, in the latter half of 2021, climbed to record levels as the economy recovered from the COVID-19 recession.The COVID-19 recession, as measured by the National Bureau of Economic Research, lasted for a period of two months beginning in February 2020 and ending in April 2020. It has since declined somewhat but remains near historic highs.

To quantify how much the labor market has tightened since the onset of the COVID-19 recession, in the next figure we plot the percent change in tightness relative to its December 2019 level. By the end of 2022, tightness had increased by 72% compared with its level before the COVID-19 pandemic. Its growth has cooled in 2023, but tightness as of August was still 32% higher than it had been in December 2019.

Simply put, there has been a shortage of workers to fill available jobs as the U.S. economy has recovered from the COVID-19 recession. As reported in the media, some industries—such as accommodation and food services and government—have suffered more from this shortage than others.

The Evolution of Labor Market Tightness: Breakdown by Industry

We now present evidence of the heterogeneous labor market tightness among different industries. Again, our data on job openings came from JOLTS, and we obtained unemployment levels by industry from CPS microdata. The figure below plots labor market tightness for January 2023 (in blue) and December 2019 (in orange) across 16 major industries as defined by JOLTS. The purpose is to compare peak labor market tightness (late 2022 to early 2023, as illustrated by the first two figures) with each industry’s pre-pandemic level of tightness. We include the December 2019 employment share for each industry to provide perspective on its relative size in the aggregate economy.

While all industries except for information and construction experienced increased labor market tightness over this period, the magnitude of those increases differed drastically. The accommodation and food services industry experienced the starkest increase, going from a tightness measure of about 10 in December 2019 to about 14 in December 2023. Notably, government had the second tightest labor market in January 2023, but its tightness had not increased by much since December 2019. Meanwhile, tightness nearly doubled for the professional and business services industry and the wholesale trade industry over the same period.

Some industries with relatively lower levels of labor market tightness pre-pandemic experienced sizable increases in tightness by January 2023, such as the real estate, rental and leasing industry (88%) and the nondurables and durables manufacturing industries (107% and 197%, respectively). Meanwhile, the arts, entertainment and recreation industry and the retail trade industry, whose tightness measures were quite low in December 2019, saw only small increases in January 2023.

Industry Contribution to Aggregate Labor Market Tightness

To understand which industries contributed to the aggregate (economywide) increase in labor market tightness between December 2019 and January 2023, the following figure plots the percent change in each industry’s tightness and the degree to which it affected tightness overall. Industries that contributed the most to aggregate growth in labor market tightness were not necessarily ones with the highest individual growth, as some of the industries with large growth in industry-level tightness had a low employment share. We find that industries that contributed the most to aggregate growth in labor market tightness were the professional and business services industry, the health care and social assistance industry, and the accommodation and food services industry.

Even though durables manufacturing saw a staggering increase in labor market tightness of 197%, its contribution to aggregate tightness growth was limited because of its relatively small employment share of 6.3%. Similarly, nondurables manufacturing, with an employment share of 3.8%, contributed to only 4.8% of aggregate tightness growth, despite a 107% increase in its own tightness measure. Intuitively, industries with both small employment shares and small increases or decreases in labor market tightness had small, negative contributions to aggregate tightness growth. These include the arts, entertainment and recreation industry, information industry and construction industry.

Sectoral Differences in Labor Market Tightness

Why would labor market tightness vary across different sectors? If unemployed workers moved freely between industries and firms produced any good or service, then we would expect tightness to be equal across industries. However, industries differ in their levels of labor productivity and the duration for which an employment relationship remains intact (or, said another way, the probability of losing a job). For instance, firms in one industry might want to post many job vacancies because of that industry’s higher labor productivity, and as a result, the level of unemployment in that industry may be low, leading to greater labor market tightness.

The Role of Industry Differences in Understanding Labor Shortages

Looking at labor market tightness can provide useful information. However, detecting labor shortages in the economy requires taking into account differences across industries that affect incentives for firms to create job vacancies and for workers to search for jobs, as well as how these differences have evolved over the COVID-19 period. Ongoing research suggests that labor markets appear tight for industries like health care and social assistance and professional and business services not because of labor shortages, but rather because of their relatively low labor productivity, which attracts fewer unemployed workers.

Note

1. The COVID-19 recession, as measured by the National Bureau of Economic Research, lasted for a period of two months beginning in February 2020 and ending in April 2020.