Why high wage growth may slow down

Luis Alvarez | Digitalvision | Getty Images

The increase in workers’ wages, which was a key element in the 2021 labor market, showed signs of fading early this year, as corporate demand for workers has moderated slightly from last year’s record levels.

Wages and wages in the private sector grew by 5% in the first quarter of 2022 compared to a year earlier, the same pace as the fourth quarter of 2021, the US Department of Labor reported on Friday.

This growth is still quite strong compared to pre-pandemic levels of around 3%, according to Nick Bunker, economic research director for North America at Indeed Hiring Lab. But the data indicate that growth may have the plateau.

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“Wages are not growing at the rate they were for big chunks of last year,” Bunker said.

“It is a signal that some of these gains and the bargaining power that workers had due to the extraordinary circumstances last year are not permanent,” he added. “They do not endure parts of the labor market.”

Employers began bidding on wages in early 2021 to compete for labor. Businesses needed workers faster than individuals were reintroduced into the workforce and took vacant jobs as the U.S. economy reopened more broadly from the pandemic hibernation.

The job picture quickly skewed in favor of workers: Job openings rose to record levels, layoffs fell to historic lows, wages grew at their fastest pace for years, and workers voluntarily left their jobs at a record level, lured by better opportunities elsewhere.

Wage gains were most noticeable in traditionally lower paid service sectors such as leisure and hospitality (jobs in bars, restaurants and hotels, for example).

Job openings and voluntary departures are still close to record highs by the end of 2021. But like wage growth, they appear to be flattening out, suggesting that the labor market has cooled as more workers return to jobs and employers’ demand for labor declines. But trends are still favorable.

“It’s a relative cooling, but it moves from 105 degrees to 98 degrees,” Bunker said. “It’s still pretty hot.”

Meanwhile, inflation has eroded workers’ increased wages.

Less than half (45%) of workers saw their wage growth faster than inflation in March 2022, according to an Indeed analysis published Thursday. That share has developed steadily declining from 58% in March 2021. (Purchasing power decreases when inflation exceeds wages).

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