By: Dividend Sensei
The reason the quit rate is one of the most important indicators of the health of the overall labor market is because the best way to gain extra pay is to switch jobs. For example a 2014 study found that workers who stayed with the same company their entire lives would end up earning about 50% less over their entire career than those who frequently changed jobs.
This is because, despite what some people think, job hopping isn’t seen as a bad thing on your resume. Skilled workers are very valuable to companies and so if your resume shows you working for several companies (say for two to three years each) then it tells the HR manager that you are an in demand worker who other companies are eager to hire. More importantly they are more likely to compete over you and each new job is likely to start at a higher wage. After all frequent job changes also indicate that you are a confident worker who leaves voluntarily for greener pastures or in this case higher pay and benefits. Now that is not to say that workers who are unhappy with their pay should necessarily quite. It’s usually a good idea to first ask for a raise if for no other reason than changing jobs and companies involves a lot of stress in its own right. You have a new commute, new co-workers, and a new corporate culture/work systems to learn and adapt to.
But the point is that a healthy labor market (and thus economy) is one that is not static but dynamic and vibrant. That means lots of turnover of companies, jobs, and workers. That is how you advance up the ladder of life and usually maximize your long-term earnings power. So from a macroeconomic perspective we want to see a high and rising quit rate, since that’s the best way for worker wages to rise. It also increases pressure on companies and small businesses to increase annual raises for workers to keep them from jumping ship.
During the Great Recession the quit rate plunged to a low of 1.3% in April 2009, and then didn’t start rising steadily until March 2010. That’s understandable since workers were so traumatized by the severity of the financial crisis that few wanted to roll the dice and leave the relative safety of a steady full time position. Since that time the quit rate has been steadily rising at about 0.01% per month. What does this tell us? Well that, barring a surprising slow down in the economy, in about another 10 months the quit rate is likely to hit 2.4%, which will be the highest level since April 2001. And in another 30 months or so the quit rate could likely hit 2.6% the highest level ever recorded. Within 40 months it could hit 2.7%, a new all time record. That would indicate a stronger job market (and more dynamic economy) than even during the height of the roaring 90’s.
The good news is that, as I track each week in my portfolio updates, the state of the US economy remains strong and there is little risk of a recession in the next few years. In fact according to Goldman Sachs’ internal economic models the risks of a recession beginning within the next one, two, or three years is 5%, 19%, and 34%, respectively.
That seems to track closely with my own macro economic conclusions which indicate that a recession is not likely coming anytime soon. That might seem surprising given that our current economic expansion is in its 10th year and the second longest ever recorded (we break the record of 120 months July 2019). However it shouldn’t be given that a study by the San Francisco Federal Reserve found that since WWII there is no statistically significant correlation between recession risk (in any given month) and the duration of the expansion.
Or to put another way expansions don’t die of old age but rather something has to kill them. And while there are plenty of risks that people worry about (such as the Fed hiking interest rates too aggressively, which triggered the last two recessions) for now the skies are clear and all signs point to things getting better for: workers, corporate earnings, and ultimately investors.