What Will the Jobs Market Look Like Next Year?

Now, as we approach 2023, the outlook is clouded in uncertainty. Twitter battles between economy bulls and bears are more pointed than ever, and the stock market is overreacting wildly to any deviation from consensus expectations in inflation reports and jobs reports. Goldman Sachs projects that the U.S. will narrowly avoid a recession. On the other hand, a Bloomberg recession-probability model puts the likelihood of a downturn starting by October at 100%.

We at

ZipRecruiter

think the likeliest outcomes in 2023 are a soft landing or no landing at all. Here are 5 predictions for the labor market in the year ahead.

1. Inflation will gradually drift downward. It may return to the Federal Reserve’s 2% target by year end, but will more likely stay well above it. Rather than pushing rates higher to ensure a more abrupt landing, the Federal Reserve will exercise patience and be content to hold interest rates at around 5%-5.25%, as inflation slowly ebbs away. The risk of breaking something in international financial markets or reversing recent labor market gains will make the Fed reluctant to act more forcefully.

As supply chain disruptions resolve, foreign demand for commodities falls, and inventory levels build back up, the prices of goods will return to their pre-Covid downward trend. And as the growth in housing costs moderates, the prices of services will grow more slowly. It will likely be more difficult to reduce inflation in the prices of services, given current imbalances in the labor market. Yet the Fed could nevertheless choose to hold steady, as long as inflation keeps moving in the right direction.

2. Workers will receive real wage gains. As of November, the prices of goods and services in the consumer price index basket had grown 7.1% over the year while average hourly earnings had grown just 5.1%. In other words, wages didn’t keep up with inflation in 2022, which led consumer purchasing power to shrink.

Those top line figures mostly reflect high inflation early in the year, however. More recently, inflation has cooled faster than wage growth, with workers once again gaining ground in real terms in the last five months. That trend will continue through 2023, as wage growth proves stickier than price growth, and nominal wage growth follows inflation downward with a lag.

The coming period of rising real wages will sustain robust U.S. demand for goods and services, thereby propping up employer demand for labor, especially in businesses like restaurants, hotels, salons, and gyms. Consumer spending will be relatively insulated from the effects of rising interest rates since households are currently spending a historically low share of their disposable income on debt service payments, and because adjustable rate mortgages now have tougher standards than before the financial crisis. In other words, when it comes to consumer spending, the positive effect of falling inflation will offset the negative effect of rising interest rates.

3. Job gains will slow, but not reverse. The U.S. economy added about 562,000 new jobs each month on average in 2021, and is on track to have added about 380,000 a month on average in 2022. But in 2023, job growth will slow as higher interest rates crimp investment and as more industries fully recover their prepandemic head count. The average job gain for the year will end up in the range of 100,000 to 150,000 a month—a level of growth the economy should be able to sustain without increasing inflation.

While this implies a substantial cooling in labor market conditions, it will be far from recessionary. Given the Congressional Budget Office’s estimate that the number of employed Americans will rise from 158 million in 2022 to 174 million in 2052, we should be comfortable with even lower numbers of job gains in subsequent years. Those projections imply net job gains of only 45,000 jobs a month on average over the next 30 years, absent an increase in U.S. population growth.

4. Pay will become more closely tied to productivity. The expansion of pay-transparency laws is prompting U.S. businesses to set explicit pay bands for different roles. Many are developing a “pay philosophy” to inform the requirements employees will need to meet to rise from the bottom of the pay band to the top, such as years of experience, skill attainment, skill demonstration, or the achievement of productivity targets. The laws are also encouraging companies to analyze and resolve pay disparities, and to track the key performance indicators that will determine pay.

Over the course of the year, the result will be increasingly deliberate and well-considered pay policies that tie compensation not to an employee’s negotiating prowess or their rapport with hiring managers during the interview process, but to objective standards. The result will be fairer and more transparent pay policies that incentivize greater employee productivity.

5. Remote work will continue to expand in industries with high remote work potential. Recently published data suggested that the remote share of job postings is falling. But ZipRecruiter data suggests that any recent decline is driven more by a shift in the industry mix of job postings—specifically the decline in job postings in tech and other white-collar industries—not by a trend toward managers forcing employees back to the office, Elon Musk style.

ZipRecruiter research highlights that remote work trends differ across the economy, with industries falling into four distinct categories: those where remote work is infeasible and never took off (such as passenger transport and food manufacturing), those where it was adopted as an emergency measure during the pandemic and is reversing (such as K-12 schooling), those where it jumped during the pandemic but has since plateaued (such as arts and entertainment), and those where it is still growing (such as technology, law, government, and healthcare).

In the latter group, there is still substantial potential for adoption, the remote share of job postings is still rising, and we predict it will continue to increase in 2023. We don’t expect the trend to reverse, even if the labor market slackens. That’s because remote work isn’t merely a perk offered to workers in a tight labor market, but an arrangement with broader productivity, efficiency, and recruiting benefits for businesses. It is also an arrangement that gathers momentum and is difficult to reverse.

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