Why high wage growth may be fading

The surge in worker pay that was a key feature of the 2021 labor market showed signs of fading early this year, as businesses’ demand for workers has moderated a bit from last year’s record levels.

Wages and salaries in the private sector grew by 5% in the first quarter of 2022 relative to a year earlier, the same pace as the fourth quarter of 2021, the U.S. Department of Labor reported Friday.

That growth is still quite strong relative to pre-pandemic levels of around 3%, according to Nick Bunker, economic research director for North America at the Indeed Hiring Lab. But the data indicates growth may have plateaued.

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“Wages aren’t growing at the rate they were for large chunks of last year,” Bunker said.

“It’s a signal that some of these gains and the bargaining power workers had because of the extraordinary circumstances of last year aren’t permanent,” he added. “They’re not enduring parts of the labor market.”

Employers started bidding up wages in early 2021 to compete for labor. Businesses needed workers faster than individuals were rejoining the workforce and taking available jobs as the U.S. economy reopened more broadly from the pandemic doldrums.  

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

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

Job openings and voluntary departures are still near record highs set at the end of 2021. However, like wage growth, they appear to have leveled off, suggesting the labor market has cooled as more workers return to jobs and employer demand for labor fades. However, trends are still advantageous.

“It’s a relative cooling, but it’s moving from 105 degrees to 98 degrees,” Bunker said. “It’s still quite warm.”

Meanwhile, inflation has eaten into workers’ elevated pay.

Less than half (45%) of workers saw their wage growth outpace inflation in March 2022, according to an Indeed analysis published Thursday. That share has trended steadily downward from 58% in March 2021. (Purchasing power falls when inflation outpaces wages.)