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Prolonged inflation, fears of a recession, mass layoffs and more all made for a rocky labor market in 2023. But it may stabilize further in the new year, experts say, as the labor market levels off and many economists expect the U.S. economy to see a soft landing.
“It’s uncharted territory all around,” says Preston Caldwell, chief economist at Morningstar. “We really haven’t had very many soft landings of this nature.”
After years of fears over a looming recession, the economy is ending the year above expectations: the unemployment rate hit 3.7% in November, the Federal Reserve is eyeing interest rate cuts next year and inflation dropped to 3.1%, down from a peak of 9.1% in July 2022.
After months of layoffs, employers have redefined the right size of their workforce and are looking ahead to slower, steadier growth. Meanwhile, workers are staying put after years of job hopping.
Among employers, “there’s a general optimism toward 2024,” says Dawn Fay, an operational president at Robert Half. “There’s this ambition to rightsize, normalize and get back on track.”
Below, economists break down three labor trends expected in the year ahead and what they mean for workers.
During the Great Resignation, many employers gave bigger pay raises and bonuses to sway employees into staying. But with bargaining power back in the hands of companies, workers shouldn’t expect the pandemic-era pay raises next year that many saw a few years ago, experts say.
With quit rates down, “employers are doing less to try to compete for the workers already in the labor force,” says Nick Bunker, economic research director at job platform Indeed. “And with less competition, there’s less wage growth.”
While wages posted on Indeed in October were up 4.2% from a year before, that’s down from July’s 4.8% and well below January 2022’s peak of 9.3%, according to Indeed’s wage tracker. Indeed predicts that if posted wages continue to slow at the same rate as the last three months, increases will be back at pre-pandemic levels by mid-2024.
Merit increases may be starting to slow, too. In a recent survey of more than 900 companies by Mercer, employers predict they’ll raise merit increase budgets by 3.5% in 2024, slightly below 2023’s increases. A study by human resources platform BambooHR found that 41% of employees didn’t receive raises this past year—up from 33% in 2022. And for those who did, their raises were 25% smaller.
Employers are looking to rein in the increases that happened outside regular pay reviews during the pandemic, says Lauren Mason, senior principal of Mercer’s career practice. “If [employees] received an outsized increase over the last year because they were a new hire or got some retention increase, they’re likely to see something less this year.”
Companies have cooled hiring in the latter half of 2023, as many look to operate at leaner levels after years of a hiring bonanza. The U.S. added 199,000 jobs in November, according to the Bureau of Labor Statistics’ latest jobs report. While the number is slightly above economists’ expectations, it’s below the 263,000 jobs added in the year prior.
Economists predict the hiring slowdown will continue next year, with experts at Morningstar forecasting flat growth by mid-2024 before recovering the following year.
But it’s not all bad news. Some employers still have optimistic hiring plans: In a recent survey conducted by consulting firm Robert Half, 57% of managers said they expect to increase the number of permanent roles in the first half of 2024.
“If you’re considering making a job transition or entering the labor market, I would do it now,” says Morningstar’s Caldwell. “I wouldn’t wait. Opportunities will dwindle further over the next year as the overall job market slows down. The timing isn’t as good as it was a year ago, but it’s still better than it will be a year from now.”
Employers cut 45,510 jobs in November, according to a recent report by outplacement firm Challenger, Gray & Christmas, up from October’s 38,836. While it may still seem like layoffs are being announced every day, that’s 41% lower than the 76,835 job cuts in November 2022.
“The sad reality of the labor market is that there are always layoffs,” Bunker says. “For next year, I’m hoping that they’re relatively contained and stay low moving forward.”
The layoff rate—the number of job cuts during the month as a percent of employment, as measured by the Bureau of Labor Statistics—sat at 1% in October, slightly below pre-pandemic figures. Experts predict the rate of layoffs will stay about the same in 2024, but there’s a risk they’ll abruptly increase to a “more recessionary level,” Caldwell says, if the U.S. slips into a downturn. “There's not too much reason to be concerned about it, but that would be one thing to watch for,” he says.
With many employers still citing struggles to find talent, Morningstar’s Caldwell says companies are wanting to hold onto the employees they have. “Firms are very reluctant to lay off any [more] workers right now after having that very visceral recent experience of labor shortages,” he says. As they look to the year ahead, “there may be some labor hoarding going on.”
