Labor Market Conditions Have Eased, but Why? A State-Level View

Tight labor market conditions over the past few years have been advantageous for workers. Many have benefited from plentiful job opportunities and strong wage gains as the U.S. economy experienced a strong recovery from the COVID-19 recession.

For example, the unemployment rate went from a more-than-50-year high of 14.8% in April 2020 to a more-than-50-year low of 3.4% in January 2023. During this period, the nation’s lowest-wage workers experienced the strongest wage growth. However, strong labor markets mean that firms may face challenges in attracting and retaining the workers they need. High rates of turnover often result in employee burnout and constant onboarding that may negatively affect firm productivity. In addition, higher labor costs may cause firms to raise prices, and the resulting inflation erodes the buying power of wage gains.

At the peak of labor market tightness in 2022, demand for labor exceeded the available supply by 6 million workers and there were twice as many job vacancies as unemployed workers. During 2023, labor market conditions eased from this peak as supply and demand moved closer to balance, with the gap narrowing to 2.8 million workers. This shift occurred against the backdrop of strengthening economic growth, moderating inflationary pressures and only a slight increase in the unemployment rate.

National Trends in Labor Market Tightness

The following FRED chart plots a measure of the quantity of labor supplied (in red) and a measure of the quantity of labor demanded (in blue) for the U.S. since 2001. We use the total civilian labor force (those working or actively seeking work) to represent the quantity of labor supplied and total employment plus total job openings to represent the quantity of labor demanded.Both the employment level and the civilian labor force are measured in number of people, but they do not distinguish between workers with one job and workers with multiple jobs. A job opening can be filled either by a new worker coming into the labor force and taking the job or by an existing worker taking it as an additional job. Considering this, these measures of the quantities of labor supplied and labor demanded are not perfect, but they are sufficient for our broad discussion of labor market imbalances. See Serdar Birinci and Carlos Garriga’s November 2023 On the Economy blog, “Overemployed Workers? Trends on Multiple Jobholders,” for more information. The gap between the two series serves as a measure of labor market tightness in the economy (we can refer to that gap as an excess demand for labor, or a labor shortage). When demand is greater than supply, a widening gap indicates tightening labor markets, and a narrowing gap indicates loosening, or less tight, labor markets.

The chart shows that an increase in the labor force (that is, the supply of labor) was primarily responsible for loosening labor markets in 2023. The labor force increased by 2.4 million workers from December 2022 to December 2023, and the gap between labor demand and labor supply closed by 2.8 million workers. The increase in labor supply partially comes from certain demographics with growing labor force participation rates. Workers between the ages of 25 and 54 had a labor force participation rate of 83.2% in December 2023, compared with 82.5% in December 2022. The labor force participation rate among those with disabilities was 24.5% in December 2023, up from 23.6% a year earlier. Women also participated in the labor force at a higher rate (57% in December 2023 versus 56.7% in December 2022).

Though changes in the supply of labor significantly loosened labor markets, changes in labor demand had more subtle, mixed effects. Nationally, the employment level rose by roughly 1.9 million workers over 2023. This was offset by a decline in job openings, which fell by 2.2 million. In total, our measure of the quantity of labor demanded remained relatively stable over the year, registering only a slight decrease of 325,000 workers. It was essentially negligible in comparison with the increase in the labor force.

State Variations in Labor Market Conditions

At the end of 2022, all states reported labor shortages, as did the U.S. on the whole. Washington, D.C., had the tightest labor market, followed by Montana, North Dakota, Louisiana and Alaska, in that order. The loosest labor markets, in order, were New York, Washington state, Nevada, Oregon and Arizona. Even though labor market conditions became less tight nationally, with the gap between labor demand and labor supply shrinking by 50% during 2023 (as shown in the FRED chart above), state labor markets exhibited varying trends.

The following figure illustrates the percentage change in a state’s excess demand for labor since December 2022 (marked by white circles), and how labor supplied (light blue columns) and demanded (dark blue columns) contributed to loosening conditions. The 50% national decline in excess labor demand is included for reference. Positive values in the figure indicate that changes had a tightening effect on labor markets. Negative values indicate that changes had a loosening effect. For example, a positive dark blue column indicates an increase in labor demanded, showing a tightening effect; a negative light blue column indicates an increase in labor supplied, showing a loosening effect.

The range of loosening among states was quite large. Nevada, Washington state, California and New Jersey led the country in closing the gap between the quantity of labor demanded and the quantity of labor supplied, and they were the only four states in the country to have surplus labor at the end of 2023 (that is, labor supplied exceeded labor demanded). Nevada’s loosening labor market came exclusively from an increase in the supply of labor, and it was the only one of the four states in which demand for labor increased. Loosening labor markets in Washington state and New Jersey came predominantly from increases in labor supply, though decreases in labor demand due to declines in job openings also contributed. Conversely, California’s loosening labor market was primarily attributable to a drop in the demand for labor: Job openings declined by 414,000 positions and employment declined by 108,000 workers.

Maryland was the only state in the U.S. to see labor markets tighten over 2023. Its growth in labor supply failed to keep up with its growth in labor demand, causing excess labor demand in the state to increase by 5%. Job openings fell by about 28,000, while the employment level rose by 69,000. The state’s labor force rose by only 35,000 workers. It’s important to view these changes in conjunction with labor market conditions in nearby Washington, D.C.This could be tied to the significant labor shortage in Washington, D.C. A state’s labor force is a reflection of its population employed or looking for work, but not necessarily those looking for work within the state. Washington, D.C., draws many workers from Maryland and Virginia. Imbalances in that region may be due to workers who reside in and commute from those states but work in Washington, D.C.

Job openings fell across all other states and Washington, D.C., but in 27 states labor demand continued to increase as the employment level rose. The states in which labor demand fell were spread throughout the country, rather than concentrated in any one region. Employment levels fell alongside job openings in 11 states: Alaska, California, Connecticut, Iowa, Illinois, Indiana, Kentucky, Louisiana, Mississippi, New Hampshire and Oregon.

In nine states—Connecticut, Hawaii, Illinois, Iowa, Kentucky, Mississippi, Nebraska, New Hampshire and Oregon—the labor force declined in 2023. In these cases, labor market loosening came entirely from reductions in the quantity of labor demanded. The largest expansions in the labor force occurred in the southern and southwestern portions of the U.S.: Nevada, Oklahoma, South Carolina, Texas and Virgina were among the six states with the greatest labor force growth (they were joined by Michigan).

Though excess labor demand persists in most states, several have labor markets that are close to balanced (as measured by the ratio of labor demand to labor supply, whereby a ratio of 1.0 indicates perfect balance). In December 2023, Arizona had the most balanced labor market in the country, with a ratio of 1.0. It was followed by New Jersey (despite its tiny labor surplus), New York, Washington state and Nevada.

Labor markets in Washington, D.C., and North Dakota remained the tightest at the end of 2023. Washington, D.C., had a demand-to-supply ratio of 1.06, and North Dakota sat at 1.04. South Carolina, Minnesota and South Dakota, in that order, had the next tightest labor markets.

Factors Affecting Labor Markets in 2024

Labor markets are considerably looser than they were at the end of 2022. Nonetheless, they are still historically tight, and signs that labor demand was exceeding labor supply existed prior to the COVID-19 pandemic and 2020 recession. So how much more loosening can be expected?

First, it is important to recognize that professional forecasters continue to see elevated risks of a recession in the year ahead. For example, a survey conducted by The Wall Street Journal in January put the odds of a recession in 2024 at 39%.The same panel put the odds of a recession in 2023 at a considerably higher 61%. Based on current data, no recession materialized. A recession would likely result in significant loosening of labor market conditions and a rise in unemployment.

Under the baseline forecast that the economy will continue to expand in 2024, albeit at a slower rate than in 2023, the path of further loosening could be a more winding one. Slower economic growth should continue to slow growth in the demand for labor, however. The outlook for the labor force is more complicated, hinging on the interactions of longer-run demographic trends, emerging technologies and structural barriers that make it more difficult for some to participate in the labor force.

Historical data suggest that the rapid growth rate of the U.S. labor force is unlikely to persist through 2024. Its growth in 2023 was about 1.3 times as fast as from 2015 through 2019.From December 2014 through December 2019, the U.S. labor force grew at an average monthly rate of 0.09%. It grew at an average monthly rate of 0.12% from December 2022 through December 2023. If labor force growth slows to its pre-pandemic trend rate, the labor force would see an increase of 1.75 million workers in 2024, about three-fourths its increase in 2023.

Further labor market loosening may come from changes in the quantity of labor that firms demand if the ratio of job openings to employment level continues to fall. If we assume that both the ratio of job vacancies to employment and the employment growth rate return to their pre-pandemic trends, the quantity of labor demanded would increase by only 121,000 positions over 2024. Taken together with labor force growth of 1.75 million workers, excess labor demand would be cut to 1.2 million jobs in 2024, which would continue to signify historically tight labor market conditions.

This does not imply that each state will have a uniform experience. State labor markets are very different and dependent on their own demographics, interstate migration patterns and industrial composition.

Notes

1. Both the employment level and the civilian labor force are measured in number of people, but they do not distinguish between workers with one job and workers with multiple jobs. A job opening can be filled either by a new worker coming into the labor force and taking the job or by an existing worker taking it as an additional job. Considering this, these measures of the quantities of labor supplied and labor demanded are not perfect, but they are sufficient for our broad discussion of labor market imbalances. See Serdar Birinci and Carlos Garriga’s November 2023 On the Economy blog, “Overemployed Workers? Trends on Multiple Jobholders,” for more information.
2. This could be tied to the significant labor shortage in Washington, D.C. A state’s labor force is a reflection of its population employed or looking for work, but not necessarily those looking for work within the state. Washington, D.C., draws many workers from Maryland and Virginia. Imbalances in that region may be due to workers who reside in and commute from those states but work in Washington, D.C.
3. The same panel put the odds of a recession in 2023 at a considerably higher 61%. Based on current data, no recession materialized.
4. From December 2014 through December 2019, the U.S. labor force grew at an average monthly rate of 0.09%. It grew at an average monthly rate of 0.12% from December 2022 through December 2023.