February Jobs Report Preview: Too Much Good News is Bad News

This Friday, the Bureau of Labor Statistics (BLS) will release the February jobs report. Most economists were quick to discount the unexpectedly strong January jobs report as an anomaly, even as many simultaneously pointed to longer-term reasons why the labor market could remain tight(ish) as the broader economy cools. Economic data and headlines over February point to accelerating and expanding layoffs across the U.S. economy, and to stubbornly persistent inflation with the implication that interest rates must move higher yet before central bankers are confident that inflation risks have passed.

Here are three trends we'll be watching for in the February jobs report:

Almost One-in-Four Jobs is in an Industry Where Management Roles Have Boomed

The labor market has now effectively recovered all of its pandemic-era job losses. As of January 2023, nonfarm private payroll employment from the BLS’ establishment survey was 2.6 percent above where it stood in January 2020 and private-sector employment excluding the self-employed in the Census Bureau’s Current Population Survey (CPS) was 1 percent higher. However, the jobs recovery skewed toward management roles: Employment of individual contributor roles was 99.8 percent of where it stood in January 2020, while employment in manager roles was 109 percent of where it stood.

Over the past decade, even prior to the COVID-19 pandemic, the “maker-manager ratio” (i.e., the ratio of individual contributor roles to people management roles) was trending gradually downward – meaning that U.S. firms were expanding their management headcounts faster than their overall headcounts. (The distinction between “makers” and “managers” was first outlined in a popular 2009 commentary by venture capitalist Paul Graham.)

This long standing trend toward expanding management ranks accelerated during the pandemic, when it fell from an average of 6.6 private-sector makers per manager in 2019 to 6.0 private-sector makers per manager in 2020 where it has roughly stayed since. Our estimates indicate about 73 percent of U.S. private sector employment is in industries where the maker-manager ratio has been approximately stable, 23 percent is in industries that have seen an outsized expansion of management roles, and 4 percent is in industries that have seen a relative reduction in management roles.

The recent expansion of management roles has not been uniform across industries, and has been larger in several prominent knowledge industries.

The chart below shows the historic average (2014-2019) maker-manager ratio for each industry, and the current (average over January 2022-January 2023) ratio. Industries above and to the left of the blue line have seen an increase in the maker-manager ratio (so, fewer managers than they have had historically) while industries below and to the right of the blue line have seen a decrease in the maker-manager ratio (so, more managers than they have had historically).

Of course, not all managers will say so in their job title, and some employees whose titles Of course, not all managers will say so in their job title, and some employees whose titles include the term “manager” will manage processes instead of people. The line in the sand between makers and managers is often blurry and shifting, particularly at smaller companies or on smaller teams where more senior employees are expected to wear multiple hats. Some industries have pivoted toward more outsourcing of independent contractor makers, who will not be reflected in these data which exclude the self-employed.

Still, the proliferation of management roles in recent years – potentially to excess – has been noted in several prominent technology industry layoff announcements, a process sometimes referred to as “organizational flattening.” Amid historically tight labor markets and rapid growth over the past two years, it is plausible that some companies opted to reward and retain employees through accelerated promotion into management roles in lieu of more generous compensation-based retention strategies (or perhaps, to justify increased compensation). That process has likely shifted into reverse.

Conclusion

The U.S. economy and labor market are starting to show signs of slowing, but more importantly, they are changing. Three years out from the start of the COVID-19 pandemic, the legacy of the past few years of extraordinary global economic and social upheaval is likely to be most acutely felt in a diminished risk appetite among U.S.  businesses and consumers. Higher interest rates and tighter lending conditions are, without a doubt, one major reason behind both recent tech industry layoffs and soft revenue in the range of industries from advertising to warehousing that enable consumer spending.

If this proves durable, it would be a noticeable pivot from the past four decades and would have lasting consequences for the labor market. Risk-intensive industries drove job gains in recent years, but less volatile sectors are likely to play a more prominent role in job gains moving forward. It is an important reminder that there is no single labor market, but rather many labor markets: Regional labor markets, industry-specific markets, and markets for workers with particular skills. These markets are, to varying degrees, interconnected but also follow their own distinct patterns.

The economy-wide data that feature so prominently in the monthly jobs report may be informative for high-level decision making, but for business and communities, that high-level view abstracts away essential differences. For all the agonizing over whether the U.S. economy is on track for a hard or soft landing, perhaps the more salient question right now is: A hard or soft landing for whom?

Methodology

To analyze the maker-manager ratio, we looked at data from the U.S. Census Bureau’s monthly Current Population Series made available by the University of Minnesota’s Integrated Public Use Microdata Sample (IPUMS) for January 2014 through January 2023.

Managers are identified using 24 occupation codes that include the term “manager” in the title Managers are identified using 24 occupation codes that include the term “manager” in the title but whose responsibilities generally pertain to people instead of process management. We exclude public-sector employees, and the self-employed.

Industries that we classify as having seen a substantial expansion in management roles reported a decline in the maker-manager ratio in excess of 20 percent between the historic (2014-2019) average and the recent (12 months prior to January 2023) average; industries that we classify as having seen a substantial contraction in management roles reported an increase in the maker manager ratio in excess of 20 percent over the same period. Industries where the absolute change in the ratio was less than 20 percent were classified as having a “stable” maker-manager ratio.