Tom Barkin

Given the historic job losses experienced during spring 2020, we might have expected wage growth to have slowed considerably during the pandemic. After all, nominal wage growth, as measured by the Atlanta Fed’s Wage Growth Tracker,¹ declined in the wake of the Great Recession, falling from 4.5 percent in December 2007 to 1.8 percent in October 2010, and remained sluggish for years. But it has been heartening to see that during the COVID-19 recession, the decline in wage growth has not mirrored the scale of job loss. COVID-19 brought only a muted and brief decline. In February 2020, overall wage growth was 4 percent. It hit its lowest point of the pandemic, 3.6 percent, by the end of the year. Wage growth in early 2021 has stayed near that level, fluctuating between 3.6 percent and 3.7 percent.

What cut the dive so short in comparison to the prior recession? I would point to three factors: the concentrated nature of the downturn, the perception that it would be short in duration and the impact of the policy response.

Damage to the economy was heavily concentrated in the service sectors, affecting primarily low-skill workers. This stands in contrast to the Great Recession and its impact on manufacturing, construction and finance. As a consequence, downward wage pressure did not ripple out much to workers overall. Low-skill wage growth did fall 0.7 percentage points between February 2020 and January 2021; at the same time, wage growth in middle- and high-skill occupations fell by only 0.1 and 0.2 percentage points, respectively.²

The uncertainty of the pandemic also dampened its impact on wages. Early on, the shutdowns and job losses seemed temporary. Many were thinking in two-week timelines and therefore had little focus on adjusting wages even as short-term demand for labor plummeted. By the time the extended length of the disruption became obvious, Congress’ policy response had bolstered demand for labor. By supporting businesses through the Paycheck Protection Program and consumers through direct payments, policy helped mitigate downward pressure on wages as well.

We are now well into the recovery, and I hear businesses around the Richmond Fed’s Fifth District say they are struggling to find workers. Basic supply and demand would suggest that a scarcity of workers should lead to faster wage growth and indeed, it seems that every day you see another company announcing entry-level wage increases. But the data don’t yet show much rebound in overall wage growth; at 3.6 percent in April 2021, it remains near its recent low and below pre-pandemic levels, not yet reflecting the escalation that anecdotes prime us to expect.

Data limitations could be one factor; it might take time for recent announcements to be reflected. Concentration again likely plays a role. The hiring challenges we’re hearing about are primarily for lower-skill jobs. Between January and April 2021, wage growth for low-skill occupations increased from 3 percent to 3.5 percent. In the same period, wage growth for mid-skill occupations declined 0.1 percentage points and was unchanged for high-skill occupations. Because of how the wage tracker is calculated, these increases at lower skill levels have a muted effect on the overall numbers.

Duration may also be having a dampening effect, as it did in the spring. Many businesses, believing that labor supply is being only temporarily suppressed by issues of child care, health or stimulus, are pushing through to the fall, avoiding “sticky” wage increases. They are using short-term measures such as recruiting bonuses and one-time signing bonuses. But if and when more employers adjust base wages, the impact could be more persistent.  

Policy, having stabilized wages during the pandemic, might well amplify wage pressures going forward. A number of our contacts point to the impact that government stimulus checks and enhanced unemployment benefits could be playing in suppressing labor supply.

So, where will wage growth go from here? Given that the initial decline in wage growth was unexpectedly muted and the recovery has brought stories of wage pressure even as millions remain on the sidelines, I won’t venture to predict the future. However, I will be watching the same three factors over the next several months, as I think they will matter: 

• Concentration: Does wage pressure stay concentrated in the lower end of wages, or does it start to put pressure further up the wage ladder?
• Duration: Will “temporary” factors such as health concerns and school closures disappear, freeing up labor supply, or will their impact linger? Will announced entry-level wage increases pressure others to do the same?
• Policy: Will the impact of policy on labor supply subside at the end of the summer? Or will additional policy impacts be felt on the demand side, for example via infrastructure spending, or on the supply side, via the forthcoming monthly child tax credit or minimum wage legislation?

Longer term, wage growth is influenced by numerous additional factors, in particular technological change as reflected in productivity growth. Understanding these dynamics, and how they interact, is essential to our understanding of how wage growth fits into the macroeconomy more broadly and is a priority for Richmond Fed researchers.