Blue-Collar Resilience to be Tested in 2023 Amid Growing White-Collar Layoffs

As interest rates begin to take effect, layoffs at white-collar companies are starting to rise. The question now is whether this trend will spread to blue-collar industries as well.

According to the Labor Department, the average number of layoffs in finance and insurance nearly doubled from September to November compared to the same period a year earlier. In addition, job cuts increased by more than 20% among real-estate lessors, brokers and agents, and by about 14% in the tech-heavy information sector.

The layoff rate in white-collar industries is still historically low, at 1% of total employment in November, according to the Labor Department. However, this is a contrast to industries where manual labor is more prevalent and pay is lower. Manufacturing, leisure and hospitality, and retail have all laid off fewer workers on average in the three months through November compared to the same period a year ago.

Job growth slowed to a still-robust 223,000 in December, a two-year low. However, it is expected to fall further this year thanks to higher interest rates engineered by the Federal Reserve to push down inflation.

Many blue-collar workers may fare better than they have in previous economic downturns. While demand for goods and services is softening, it is still too high for many employers to consider layoffs. If demand does soften further, industries such as leisure and hospitality may hesitate to fire the front-line workers they struggled to hire and retain during the pandemic rebound, some economists contend.

Inflation-adjusted consumer spending on durable goods has slowed down over the past year, but is still 26% higher than it was before the pandemic. That's helping to drive manufacturing hiring despite elevated interest rates, said Andrew Flowers, lead labor economist at recruiting software firm Appcast.

"I expect that the construction labor market will eventually start to soften, but it won't collapse," Mr. Flowers said. "The manufacturing labor market will also start to soften, but it won't collapse. We actually have a better economy than a lot of people think."

Carl Tannenbaum, chief economist at Northern Trust, believes that white-collar layoffs will not quickly spread to blue-collar industries. He believes that travel, leisure, and entertainment firms have worked hard to rebuild their workforce and are now reluctant to lay off employees.

If the economy goes into recession and layoffs remain concentrated in white-collar sectors, that would be a departure from previous downturns.

Blue-collar workers have been hit harder by job losses during recessions than white-collar workers, according to an analysis of Labor Department data. During the recessions of 1990-91, 2001, 2007-09 and 2020, blue-collar workers in sectors such as hospitality, manufacturing, construction and retail experienced steeper job losses than white-collar workers. In early 2020, when pandemic shutdowns began, blue-collar employers cut payrolls at more than twice the pace of white-collar employers.

Nela Richardson, chief economist at ADP, said that lower-wage workers were hit hardest during the pandemic downturn. She said that firms in tech and finance leaned into the pandemic economy and hired aggressively, but now they have to recalibrate their hiring strategy to accommodate a slowing economy.

Ms. Richardson said that the current economic situation is unlike any that many tech companies have confronted. Many of these companies weren't around 40 years ago, so they haven't experienced inflation at this level.

When interest rates rise, companies are less likely to invest in a new product or idea, according to Aaron Terrazas, chief economist at Glassdoor.

"When interest rates are low, many business ideas that may have seemed profitable suddenly don't look as attractive," Mr. Terrazas said.

This helps explain why a large number of layoffs occur in white-collar industries such as tech and finance, whose businesses are typically more risky and reliant on innovation, according to him. Furthermore, businesses looking to cut costs often start by reducing support roles in human resources, legal, and management.

At the end of December, job postings for human resources positions on Indeed.com were down nearly 36% from a year earlier. This is compared to a decline of only 9% among all postings.

Construction is one blue-collar sector that is particularly vulnerable to rising interest rates. James Knightley, ING's chief international economist, said, "We seem to be going from a situation of huge excess demand for home purchases to one of excess supply in the housing market."

Mr. Knightley warned that the housing market slowdown could lead to large job losses in sectors like residential construction and retail that are related to housing. He pointed to rising construction layoffs as an early sign of trouble, with layoffs in the construction sector up 14.4% in the three months ending in November compared to a year earlier. This is outpacing the 2% increase in overall private-sector layoffs.

Although losses in other blue-collar industries could be muted, employers haven't been able to find enough employees following layoffs during the recession in spring 2020. In December, for example, the leisure and hospitality industry was still 932,000 jobs short of its February 2020 level, and vacancies in November were 551,000 higher.

"We typically think of lower-paid workers as being the most vulnerable," Mr. Tannenbaum said. "However, some of those lower-wage occupations actually have more leverage than they used to, because quite a number of people who were working in those sectors left them during the pandemic."