2021’s Hot Wage Growth Will Likely Cool by Year’s End—Before Surging Again by 2023

Rising Wages Set to Drive New Opportunities—and Uncertainties—Over the Next Decade    

 Thus far in 2021, wages in the US have grown at the fastest pace in over 20 years, fueled by a rapid economic reopening in the wake of COVID-19 vaccinations. Why Wages Are Growing Rapidly Now—And Will Continue to in the Future,a new report from The Conference Board, details how this surge is likely to challenge organizations’ recruitment, retention, and compensation strategies in the near term—and over the next decade as pandemic uncertainties fade and long-run demographic factors come to the fore.

“The rapid wage growth currently underway in the US is a result of temporary—albeit, severe—labor shortages, especially in blue-collar and manual services jobs, said Gad Levanon, Head of The Conference Board Labor Market Institute. “While we expect wage growth to slow a little in 2022, in the coming decade a tight labor market that drives wage pressures will be the norm. This will largely be due to the sizable generation of Baby Boomers continuing to retire, without enough people to replace them to meet the growing demand for workers.”

The report maps out three distinct phases in the outlook for US wages:

Heated Wage Growth in Spring and Summer of 2021

• According to the Employment Cost Index, wages and salaries for private industry workers rose 4.3 percent (annualized) over the six-month period ending June 2021—much higher than the average of 2-3 percent over the past two decades.
• Heated wage growth continued through summer 2021, especially for blue-collar and manual services jobs. These workers were in high demand as the economy reopened, even as pandemic concerns (e.g., fear of infection, lack of childcare) continued to keep many out of the workforce.
• Faster wage growth could have a significant impact on consumer and producer price inflation. If higher costs are passed through to consumers, this could lead to a longer period of high inflation.

Wage Growth Cools in 2022

• Wage growth should cool heading into 2022, settling closer to the long-run average of 2.5-3 percent by next year.
• This cooldown reflects the resolution of demand-and-supply mismatches as more workers reenter the labor market. However, another significant wave of coronavirus infections that limits in-person instruction in schools could reduce the willingness to work among some unemployed persons and delay the beginning of the slowdown in wages.
• The acceleration in wages for new hires in 2021 could lead to a unique situation, where new hires earn more than current employees with more experience. Such inequity could lead to higher labor turnover of more experienced workers, who can easily find new jobs at higher wages in this tight labor market.
• Inflation is emerging as a downside risk for employers. After being a non-issue in wage determination for several decades, strong inflation in 2021, and perhaps 2022—if households’ long-term expectations rise—is likely to push wages higher. In a more extreme and less likely scenario, high inflation and severe labor shortages could lead to a wage-price spiral, where higher prices and wages feed each other, leading to faster growth in both.

Demographic Trends Accelerate Wage Growth Again in 2023 and Beyond

• Wages will grow rapidly in some occupations in 2023 and onward, most notably in blue-collar and manual services industries. Historically strong job growth from 2021 to 2022 is likely to significantly lower the unemployment rate. If history is any guide, this trend is likely to continue until the next recession, which could occur five to ten years from now.
• Blue-collar and manual services will again reap significant rewards, as the shrinking of working-age Americans without college degrees curtails the long-term supply of workers in these fields.
• The pace of automation will shape how rapidly employment grows, and the unemployment rate dropping depends partly on the rate of automation. Ultimately, more automation will reduce the demand for labor and delay a decline in the unemployment rate.
• The shift to remote work will significantly impact not only how we work, but also how wage trends develop in the near term. Employers operating in expensive labor markets may be able to lower overall labor costs by hiring more workers in cheaper US labor markets or abroad. Moreover, many companies are likely to have flexible wage structures allowing differentiation in compensation across regions.

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Jonathan.Liu@tcb.org

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