Stuck in Neutral: Why Employees are Staying Put

• Attrition rates have reached their lowest point in a decade. This trend is prevalent across various industries and roles, particularly in the tech industry and within tech-specific roles.

• The decline in attrition can be explained by different factors, including macroeconomic conditions (such as the unemployment rate, demand for labor, and labor market tightness), employee sentiment, and salaries. Our analysis shows that salaries and labor market tightness account for a substantial portion of changes in attrition.

• Under what conditions would attrition return to its long term average? Our model suggests that an increase in demand (15% increase in job postings), combined with 10% higher salaries and a tighter labor market (job postings taking 10% longer to fill), would increase attrition to its average level.

In an era of economic uncertainty, the labor market has taken an unexpected turn. Dubbed the "Great Stay," employee attrition rates have plummeted to a decade-long low, particularly in the tech industry. Yet this phenomenon coincides with a surprising decline in job satisfaction, creating a unique paradox.

By examining key variables such as employee sentiment, salaries, and labor market conditions, we uncover complex dynamics at play and can project scenarios for a return to healthier attrition levels. As organizations and workers navigate this unusual landscape, understanding these trends becomes crucial for strategic decision-making and long-term workforce planning.

Amid the uncertainty, the labor market can best be described as resembling a deer in the headlights, with companies hesitant to hire, and employees staying with their employers longer than usual. Consequently, attrition has reached its lowest level in a decade across the economy, a phenomenon that is observed across multiple data sources including the Bureau of Labor Statistics’ Job Openings and Labor Turnover Report (JOLTS). This decline in attrition has given rise to the term the "Great Stay."

The decline in attrition is widespread across all sectors, but it is most pronounced in the tech sector. The tech sector, known for its high turnover rates and frequent job-hopping, has seen a dramatic shift in the past year. Attrition rates peaked during the 2022 "Great Resignation" but have since fallen steadily; in 2024, both attrition and hiring reached their lowest points in a decade. This low attrition stands in stark contrast to previous years, where the tech sector had high workforce turnover rates: Frequent job hopping was common and rewarded, and this dynamic turnover drove a constant exchange of talent and ideas that served the industry’s continuous pursuit of opportunity and growth.

Paradoxically, employee satisfaction is at an all-time low. One might expect that declining satisfaction would correlate with higher turnover, but the opposite has been true in the US since the Great Resignation. This juxtaposition raises a crucial question: Are we on the brink of an "Attrition Avalanche," or is this just a temporary lull? Could this low attrition create pent-up pressure that amplifies future turnover when market confidence and labor demand return to normal rates? What factors could restore a healthy level of attrition?

To identify the determinants of attrition, we examine which factors correlate with high employee turnover. These factors include salaries, employee sentiment, labor market tightness (proxied by job availability and the length of time to fill open postings), and the macroeconomic environment (proxied by the unemployment rate):

1. Employee sentiment

We hypothesize an inverted U-shaped relationship between employee sentiment and attrition. Improving ratings from very low levels may not significantly impact retention, but beyond a certain threshold, higher ratings correlate with lower attrition.

2. Salaries

We also hypothesize that the relationship between salaries and attrition varies across the pay spectrum, and also follows an inverted U-shape. At the lower-end of the salary spectrum, slightly higher salaries might not help with retention if workers can find similar opportunities for a higher pay or better job amenities. After all, it is relatively easy for low-wage workers to switch jobs even when the labor market is not tight. However, for high-paid workers, increased compensation generally reduces attrition.

3. Labor market conditions

Changes in the labor market and macroeconomic factors also play a role in determining attrition. Key factors include labor market tightness (proxied by the time it takes to fill a job opening), job availability (proxied by the number of active job postings), and the unemployment rate. For example, labor market tightness influences how easily workers can find alternative employment. In a tight labor market, where demand for workers in a given role exceeds supply, employees may feel more confident in leaving their jobs, leading to higher attrition. The availability of job opportunities further amplifies this effect, providing employees with more options to switch roles. Conversely, higher unemployment rates typically discourage job changes, as the perceived risk of unemployment makes workers more likely to stay in their current positions. These labor market dynamics are crucial in understanding the factors driving employee turnover.

4. Role-specific, industry & company-specific factors

Some roles face higher turnover than others, as moving up the seniority ladder requires workers to consider making job transitions more strategically. Industry and company-specific factors also play a key role in driving attrition. Industries with higher demand for specialized skills or faster growth rates often experience greater attrition as workers are more likely to pursue better opportunities. Company-specific factors, such as workplace culture, compensation packages, and career advancement opportunities, also significantly influence an employee's decision to stay or leave. Firms with strong leadership, competitive pay, and clear growth paths tend to retain talent more effectively, while those with poor management or limited career development options may see higher attrition rates.

With this understanding, we can conduct a multivariate analysis to analyze the factors that explain the decline in attrition. The table below shows the estimated relationship between each explanatory variable and attrition:

In our analysis, we find that a 10% increase in salary is associated with a 0.793 percentage-point increase in attrition, while a 10% increase in employee satisfaction is associated with a 0.074 percentage-point decrease in attrition. Meanwhile, a 10% increase in labor demand (proxied by job postings) is associated with 0.003 percentage-point increase in attrition. Finally, a 10% increase in the unemployment rate would result in a 0.015 percentage-point increase in attrition–most likely involuntary attrition.

Using this regression model, we can predict what the quarterly attrition rate would have been if it were fully explained by the factors above. We show this “explained” attrition rate as the green line in the figure below, while we depict the actual attrition rate each quarter using the blue line. We can see that while the blue and green lines closely track most of the time, the model does not fully explain the drop in attrition rates in 2024. We conclude that the large drop in attrition in 2024 is largely unexplained by variables included in the model and is instead driven by other factors.

Nonetheless, we want to understand how to bring attrition back to a healthy level. Companies need to have a moderate degree of employee turnover that enables the infusion of fresh talent, new ideas, and adaptability to changing business environments. A very low level of attrition can result in stagnation, limited opportunities for new hires, and potentially an aging workforce that may be resistant to change. On the other hand, excessively high attrition can disrupt operations, increase recruitment and training costs, and weaken team cohesion. A healthy attrition rate allows for a steady inflow of talent without undermining organizational stability or increasing unnecessary costs. Understanding this optimal level is essential, as it provides a benchmark to distinguish between normal turnover and potentially problematic retention strategies.

We use the average level of attrition over the past decade as an anchoring point for our analysis. Since 2014, the average attrition rate has been 17.8%, 3 percentage points higher than the 14.8% attrition rate in the second quarter of 2024. We use the regression results presented above to simulate the changes in macroeconomic, company, and role-specific factors that would increase the current average attrition rate to 17.8%.

To return to a healthy attrition level of 17.8% (the average since 2014), our model suggests the following changes: a 10% increase in job postings (to 880,000), a 15% increase in time-to-fill (to 42.8 days), and a 10% increase in average annual salaries (to $106,000).

Over the past two years, economic uncertainty has driven both hiring and attrition rates to their lowest levels since the COVID-19 recession, signaling conditions for an unhealthy labor market. While hiring still outpaces attrition, expanding the workforce and staving off a deeper recession, the key question remains: How long can these conditions persist? And what role can macroeconomic policy play in revitalizing the labor market? Interest rate cuts would certainly stimulate labor demand and increase wages to the levels suggested by our analysis, making it easier for firms to attract new workers. Timely and effective interventions by the Fed can help bring a sustainable revitalization of the labor market.