Executive Summary
Wage growth in the US through 2022 and beyond fits into three distinct phases: 1) strong wage growth in the spring and summer of 2021; 2) moderating wage growth by late 2021 and during 2022; and 3) renewed acceleration of wages in 2023 and beyond, most notably in blue-collar and manual services.
While beneficial for workers, higher wages probably reduced corporate profits and contributed in part to 2021’s inflationary environment. Indeed, rapid wage growth might be one of the catalysts that prompts sooner-than-expected tightening of monetary policy (i.e., the Fed’s decision about when to taper quantitative easing and increase interest rates).
There is some relief in sight from the employer perspective: wage growth in the final months of 2021 and 2022 should slow as the pandemic’s demand-supply mismatches are resolved and more workers reenter the labor market. Wages likely will grow closer to the long-run average of 2.5-3 percent, especially in 2022. However, looking ahead to 2023 and beyond, wage pressures are likely to resurface.
The rapid decline in the working-age population without a bachelor’s degree is likely to generate continuous labor shortages of blue-collar and manual services workers. The rate of wage growth in these jobs should be relatively robust in most years until the next recession.
Workers in private industry see fastest pay increases in 20 years
Insights for What’s Ahead
Heated wage growth in summer 2021
- Through the summer of 2021, wages will continue to grow, especially for blue-collar and manual services jobs as the economy reopens and willingness to work among some is limited.
- Spring of 2021 saw the fastest wage growth in the US in 20 years—and the trend has continued into summer at the time of this publication. According to the second quarter Employment Cost Index report, wages and salaries for private industry workers increased at a 4.3 percent annualized rate for the six-month period ending in June 2021. This was much higher than the growth rate over the past two decades, which has stayed mostly in the 2 to 3 percent range. The acceleration in wages is most noticeable in blue-collar and manual services occupations.
- Faster wage growth could have a significant impact on consumer and producer price inflation, and if higher costs are passed through, this would ultimately affect monetary policy. Indeed, rapid wage growth may prompt sooner-than-expected tightening of monetary policy (i.e., the timing of quantitative easing tapering and interest rate hikes).
Cooling off in late 2021 and 2022
- Wage growth should slow by late 2021 and into 2022 as demand and supply mismatches are resolved and more workers reenter the labor market. Wages will likely grow closer to the long-run average of 2.5-3 percent, especially in 2022.
- However, another significant wave of coronavirus-related infections and limited school openings for in-person instruction in September could reduce the willingness to work among some unemployed persons and delay the beginning of the wage growth moderation phase beyond the summer of 2021.
- 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.
- Extreme labor shortages driving accelerated wage growth in the first part of 2021 are likely to be over by year-end, as individuals may be more willing to return to the workplace. The result would be fewer recruiting and retention difficulties and less upward pressures on wages for new hires.
- Overall, wage growth in 2022 will be lower than in 2021 but still in line with prepandemic rates of about 2.5-3 percent.
- Another source of wage growth in late 2021 and 2022 could be inflation. After being a non-issue in wage determination for several decades, strong inflation in 2021, and perhaps 2022 (if household’s 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.
Demographics drive wages up again in 2023 and beyond
- Wages will grow rapidly in some occupations in 2023 and onward, most notably in blue-collar and manual services because of a shrinking working-age population and low unemployment rates, with some offset from increased automation.
- In 2023 and beyond, wage growth is likely to be stronger than in the decade prior to the pandemic because of a shrinking working-age population and low unemployment rates.
- Historically strong job growth from 2021 to 2022 is likely to significantly lower the unemployment rate, and if history is any guide, this trend is likely to continue until the next recession, which could occur five to ten years from now.
- How rapidly employment grows and the unemployment rate drops 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 projected rapid decline in the US working-age population without a bachelor’s degree in the coming decade is likely to lead to a shortage of blue-collar and manual services workers, accelerating wages in those sectors as early as 2023.
- 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.
