1.5 million fewer jobs. How HR leaders can manage interest rate shocks to their workforce

HR leaders need to understand how the rate increases will affect labor markets — and what that means for hiring, retention, and learning and development initiatives.

Pearson's Labor Market Insights analyzes the impact of economic and technological change on the future workforce. We examined the impact of the rate increases in 2022 and 2023, then compared job creation forecasts under two scenarios:

• Business-as-usual, or "base case," that estimates what would have happened if the Fed hadn't raised rates and job creation had continued in the same way it did for the previous 10 years.
• Interest rate hikes that began in 2022 continue through 2023 before the Fed returns to normal monetary policy. Of course, the economy is complex, and we can't predict every possible factor that could affect job creation, so these numbers are estimates.

The economic jolt of those interest rate increases not only affects how many jobs will be created, it also affects the pace of other disruptive forces in the economy, such as digital transformation and the effects of technology, which are changing every industry.

We found that the Fed's interest rate increases in 2022 and 2023 will likely have the following impacts through 2027: 

• Overall, fewer new jobs will be created
• Some more vulnerable industry sectors will face pressure to transform their businesses through technology more quickly
• Impact across different states will be uneven, with bigger states bearing some of the biggest impacts

Fewer new jobs

Interest rate hikes create employment shocks because they reduce industry output and shift consumer spending. There are six forces that drive these changes:

1. Uncertainty over monetary policy
2. Difficulties for small and medium-sized tech companies to continue hiring plans
3. Higher consumer debt costs that cut consumer spending
4. A housing downturn that could spread to other sectors
5. The sensitivity of finance industry jobs to interest rates
6. New job creation focused on technology for competitive success

We found that nearly 1.5 million fewer jobs are likely to be created over the next five years as a result of interest rate increases.

The reduction in new job creation will be felt unevenly across the economy, however, creating headwinds that HR leaders will need to navigate to ensure success for their organizations.

Vulnerable sectors

Some sectors of the economy are more vulnerable to rising rates. Higher rates will also affect how quickly companies pursue digital transformations — their ability to do so.

Workers in the finance and insurance; professional, scientific and technical; manufacturing; and retail sectors would be the most vulnerable to interest-rate driven reductions in job growth.

Higher consumer debt payments due to higher interest rates, for example, are likely to lead to reduced retail spending. That, in turn, will mean fewer new retail jobs will be created. It will also intensify pressures to reduce costs and increase revenues through digitization.

Digital innovation and increasing technology adoption mean companies may need fewer of the types of workers they’ve used in the past (such as retail clerks) but more tech-savvy employees (such as developers).

For HR leaders, this means they’ll have to adapt new strategies to hire, retain and retrain workers based on their companies’ strategic initiatives in the next few years.

If interest rate increases trigger a housing downturn, that could ripple through to other sectors, such as manufacturing and construction. Jobs that are highly manual and repeatable are at a higher risk of being replaced with technology.

The financial sector is highly sensitive to interest rates, so it’s not surprising that industry is most vulnerable to higher interest rates. Some 1 million jobs in the financial sector are likely to change significantly in the next few years, which will put further pressure on individuals and employers to adapt.

Geographic impact

Industries and jobs are spread across the country unevenly — think of the concentration in tech jobs in Silicon Valley or of finance jobs in New York City, for example. That means that the impact of interest rates on job growth in the next few years may be spread unevenly.

States that have high numbers of jobs in certain sectors could face more disruption in the form of lower job growth and increased urgency for employers to adapt to shifting markets through technology. California, for example, employs the most retail employees — 1.5 million — and so is likely to be more affected by disruptions in that industry.

How employers can respond

These disruptions create a number of challenges for employers. Reductions in revenues will make it more difficult for some organizations to fund technology adoption and innovation. With higher interest rates, small and medium sized enterprises are also less likely to be able to access financing at a reasonable cost — even if their revenues remain strong.

At the same time, pressures to control costs while growing will increase. Many employers will respond to finding ways to use technology — including robotics, automation and data analytics — to build more efficient businesses and find new revenues.

The opportunity — and challenge — for many companies will be to reshape their workforce. They will want to add new skills and capabilities to take advantage of technology opportunities.

Strategic workforce planning software can help. Employers can use a robust platform that gives them verifiable information about their current workforce to find opportunities to upskill and reskill workers for new roles as they transform their business.

For example, as the finance industry adopts more technology, it may need fewer financial advisors but more computer systems analysts. Fortunately, those two groups share many overlapping skills, such as collaboration, independence and mathematical reasoning.

Workforce planning software that incorporates skills data, such as that provided by third-party credentials, can map career paths — corridors from one role to another.

HR leaders and L&D managers can develop appropriate upskilling and reskilling programs to help people make the transition from one role to another. In the process, they’ll retain employees and also better align company talent pools with strategic goals.

Pearson’s Workforce Solutions helps companies take a skills-based approach to talent management. To understand how it can future-proof your workforce, schedule a demo.

Schedule a Workforce demo today.