Posted by: Josh Lehner | March 30, 2022

Shifting Labor Market Dynamics

For much of the past two years the major labor market story has been the rebound in the hard-hit, low-wage industries and the strong wage gains seen or needed to do so. Today, low-wage sectors in Oregon still have the largest jobs hole left to fill, but the relative gap with the rest of the economy is much narrower. Strong recent job gains plus upward revisions during the recent round of benchmarking to sectors like retail, and leisure and hospitality means a full recovery is nearly here.

However, as the overall structure of the labor market approaches normal, or at least a new normal that has some structural changes, different drivers and patterns of growth will emerge. The underlying labor market dynamics are shifting in important ways. Specifically, some of the dynamics seen in low-wage industries thus far — namely rising wages but also higher quits rates — are spreading up the ladder into middle- and high-wage industries. Additionally, as low-wage industries regain their employment levels, it means the composition of job gains in the years ahead will be better balanced across sectors, although every sector today is at a different point in recovery/expansion process.

Now, with inflation running hot only the lowest-paid 20% of workers have seen wage gains faster than inflation in the past 6 or 12 months. That means 80% of the workforce are seeing real wage declines. That is, their wages are rising but at a slower pace than inflation. As such, stronger wage gains are beginning to move up the ladder. See the “wage level” breakdown on the Atlanta Fed’s wage growth tracker for more.

A big question here is what are the macroeconomic implications of faster wage growth among higher-paying jobs? One thing is that the purchasing power of a high-wage job is much greater than a low-wage job. A modest wage gain for an accountant or doctor creates more spending power than does a huge wage gain for a fast food worker. As such, as stronger wage growth moves up the distribution, it creates larger and larger dollar increases in total wages earned by the workforce. This is true even as some of the pandemic dynamics lessen as wage growth moderates among the hard-hit sectors and labor supply improves some. You can see this in the chart below.

What this analysis does is take the U.S. labor market and line it up from lowest- to highest-paying industry at the 3- and 4-digit NAICS level, and then creates quartiles of employment (groups of 25% of the total). We then look at the increase in aggregate wages (combined change in employment, hours, and hourly wages) over the past 6 months and compare that to the prior 6 months. You can see the strong, but decelerating impact of gains among the lowest-paid sectors. More evident is the acceleration up the wage scale. Note that the big increase in the second quartile is almost entirely due to employment services (temporary help). Even so, the dollar amount of the aggregate weekly wage increase among the top two quartiles is twice that the changes seen among the bottom two quartiles. Incomes are rising, and the dollar increases are strongest at the top.

These overall shifts in the labor market are important. The economy is moving from recovery to expansion. However some of the pandemic dynamics are not going away. To the extent that wage gains continue to move up the distribution it will boost household incomes by a larger dollar amount, even if the percentages remain strongest at the lower end. Stronger household incomes better support consumer spending, and therefore a continued ability to absorb higher prices. As Fed Chair Powell recently noted (HT: Tim Duy), supply-side healing is likely to come but at some uncertain date in the future. He goes on to say “as we set policy, we will be looking to actual progress on these issues [inflation] and not assuming significant near-term supply-side relief.” In other words, the Fed is raising interest rates to cool the economy and inflation and cannot assume inflation will slow on its own. A key part of that story is strong household finances which look likely to continue.

Finally, as an aside: Our office has done a few public sector presentations recently and one item we highlight is how public sector wages have lagged private sector gains during the pandemic. Some of that may be a slower response in part due to the composition of the workforce, and some may be due to collectively bargained wages that are locked into contracts. Regardless, it is likely public sector wages will rise faster in the year(s) ahead than they have in the past two. This is likely true now that the state and local government quits rate is rising, creating the same type of dynamics experienced by the private sector.


Responses

  1. “Regardless, it is likely public sector wages will rise faster in the year(s) ahead than they have in the past two.”

    As a taxpayer, thanks for the warning 🙂

  2. […] Source: Shifting Labor Market Dynamics | Oregon Office of Economic Analysis […]


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Categories

%d bloggers like this: