Labor Hoarding Has Kept the Economy Alive. Is It Ending?

(Illustration by Remie Geoffroi)

About the authors: Jeff Korzenik is chief economist at Fifth Third Commercial Bank, and Josh Waynick is senior investment strategist at Fifth Third Private Bank. The opinions expressed are their own and aren’t necessarily the opinions of Fifth Third Bank.

Something unusual is going on in the labor markets. Federal Reserve Chair Jerome Powell pointed it out after the most recent Fed meeting on Oct. 29. Despite materially cooler hiring, the unemployment rate isn’t rising. “It is a complicated situation,” he said.

This oddity is labor hoarding. Employers are reluctant to lay off workers because they aren’t confident they can fill roles when labor demand returns. It is likely what has so far saved the U.S. from a recession.

Historically, the hiring rate played a defining and predictable role in the health of the economy. When hiring accelerated, unemployment fell. When hiring slowed, unemployment rose. This relationship is being challenged right now, as we see cooling labor demand and supply. Powell attributes this to declining labor participation and a shrinking supply of immigrant workers. We believe it boils down to labor hoarding.

The past few years seemed to be following the familiar road to a recession: reduced job creation, cutbacks in hours, and reduced reliance on temporary workers. Annual job additions slowed from over seven million in 2021 to two million in 2024. The economy is likely to add fewer than one million jobs this year. Since 2021, average hours worked has also moved lower, while annual wage growth has slowed from more than 5% to 3.7%. The share of temporary workers as a percentage of the labor force moved from 2.1% to below 1.6%, a drop mirrored in past economic recessions. Only the drop from 2005-09 was greater.

The hiring rate, or monthly number of job hires divided by employment, has declined from more than 4.5% to 3.3% over the past few years. That drop is more dramatic than that during the 2001 dot-com bust, the 2008-09 financial crisis, or the short recession during the Covid-19 pandemic.

Yet the unemployment rate has stayed low. It only recently reached 4.3%, thanks to labor hoarding. This phenomenon started as a response to the historic labor gap that began in 2021. At the time, U.S. managers were long accustomed to a surplus of labor: more job seekers than job openings. But the post-Covid reopening of the economy, coupled with accelerated demographic shifts, demanded a shift in focus on talent management.

Evidence supporting this can be found in public companies’ filings. Mentions of phrases like “labor shortage” (or synonyms) peaked at the end of 2021. Then, phrases that signal labor hoarding—talent retention, labor investment, minimizing churn—rose, peaking in 2023.

To underscore the impact of this shift, consider the current hiring rate of 3.3%. Outside of the past few years, this low level of hiring would traditionally have been paired with an unemployment rate of greater than 6%—a shift to that level would indicate a recession.

Labor hoarding has helped us avoid such a recessionary outcome.

And yet what the labor shortage created, labor abundance can take away. At its most painful, there was a deficit of 6.1 million workers in March 2022. Today, labor markets appear to be far more in balance. There are 7.2 million job openings and 7.4 million job seekers.

But such a balance is anomalous. From 2001 through 2017, domestic labor markets had a constant labor surplus, with an average of 5.3 million more job seekers than job openings.

Parity in labor markets is new—but we aren’t convinced it should be considered the new normal. Employer memories can be short, particularly when they are incentivized to meet short-term bottom-line targets. If businesses no longer fear a labor shortage, they might resume mass layoffs. Layoffs have already affected tens of thousands of workers in recent months, and job cuts are projected to surpass one million by the end of the year. The end of labor hoarding feels near.

If labor hoarding is indeed ending, the question is what will follow. Renewed layoff activity may simply reflect a normalization of the labor market, whereby hiring may pick up to offset job losses. Our analysis suggests that the paralysis in the business community related to tariff and migration policy may be passing. Uncertainty is falling, as measured by surveys of small companies by the National Federation of Independent Business. That offers the possibility that any hiring that had been put on hold this year will soon resume.

Unfortunately, there is another, more troubling possibility supported in the data. The NFIB’s surveys have yet to show a pickup in hiring among small companies. A survey of purchasing managers by the Institute of Supply Management shows that hiring is contracting for both the manufacturing and service sectors.

At a minimum, the passing of labor hoarding introduces a new component of risk to economic growth. It cushioned the economy through the worst inflation of the past half-century. It insulated the labor market from some of the largest bank failures in U.S. history—and even gave the “Sahm rule” (a recession indicator) its first false positive signal.

Labor hoarding has been an unsung hero, keeping our economy at full employment. We had better hope it continues.

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