Tight labor markets and wage growth in today’s economy

Labor markets in the US are currently tight and generating substantial growth in nominal wages – that is, those measured in current dollars (not adjusted for inflation). On the other hand, wage growth does not appear to be keeping up with inflation at the moment, however the latter is measured.

If the tightness of the market will last and if workers can expect to enjoy some real (or adjusted for inflation) wage growth in the short term, it is very difficult to predict. Still, some data on our currently tight labor markets, and the wage growth they have or have not generated, may give us insight into how economic policymakers should respond to current circumstances, including high inflation. If possible, we want to help generate more real wage growth for workers, especially those in low-wage jobs and industries, whose real wages have mostly stagnated for decades (Groshen and Holzer, 2021).

These are what I think are the most important facts about the current tight labor market and recent wage growth.

one. Until recently, nominal wages have kept pace with inflation, allowing real wages to grow since the start of the pandemic.

Figure 1 indicates that workers enjoyed real wage growth of more than 2 percent in 2020-21, even after adjusting for the fact that the composition of the workforce changed in that time period.one Unfortunately, inflation has outpaced wage growth since mid-2021; But, if supply-side price shocks abate soon, real wage growth could return (as long as such growth doesn’t lead to too much inflation).

two. Nominal and real wage growth has been higher in sectors of the economy with lower wages.

Figure 2 indicates that nominal wages increased the most among leisure/hospitality and retail workers, the two lowest-wage sectors of the US economy, and especially among non-supervisory workers. Using virtually any price index to adjust for inflation during these two years, workers in these sectors experienced real wage growth.two

3. High job vacancy and attrition rates in leisure/hospitality and retail have apparently generated the strongest wage growth we see in these sectors.

Figure 3 shows that while overall vacancy rates in the US economy are 7%, those in retail and leisure/hospitality are 8-10%. Alex Domash and Larry Summers (2022) recently showed that vacancy and resignation rates are the strongest predictors of wage growth, and cross-industry comparisons support that view. It is also clear that rising attrition rates, overall and within these sectors, may explain some, but not all, of the rise in job vacancy rates between 2020 and 2022; this indicates that vacancies are more frequent but also last longer than before, as workers seem less likely to accept the salary offers they receive.3

Four. The decline in labor force participation now accounts for nearly all of the “lost jobs” (relative to the pre-pandemic labor market) in the US today.

Using monthly employment data from the BLS, the decline in labor force participation between February 2020 and 2022 accounts for about 85 percent of the decline in the employment-to-population ratio in that period; the rest is explained by unemployment, which can reflect factors both on the labor demand side (employer) and on the supply side (worker).4 This reinforces the view that it is aggregate labor supply that most constrains job growth now, rather than lack of labor demand, and supply constraints also drive up job vacancy rates.5

5. Productivity growth has likely helped drive some of the real wage growth we’ve seen, and could play an even bigger role going forward.

Productivity growth appears to be an important source of real wage growth over time, although the relationship between the two has weakened somewhat over time (Stansbury and Summers, 2017). And measured productivity growth has averaged more than 2 percent a year since the pandemic, which, had everyone’s share of production held steady, could have generated real wage growth of 4 percent. Unfortunately, supply-side price shocks are likely to have lowered labor’s share of production. On the other hand, if such shocks decrease; And if we find ourselves in what some economists call a “Solow moment,” when the economic benefits of automation, in terms of higher productivity, will soon become clearer, real wage growth could make a comeback.6

6. Education and training could also help ensure that workers benefit from productivity growth, in the form of real wage growth, in the future.

Vacancy rates and wage growth in professional services and health care have also been substantial, indicating a strong demand in these sectors for workers with post-secondary education and training.7 In addition, the new infrastructure bill (and baby boomer retirements) will likely create increased demand for labor in construction and manufacturing, which could be met by well-targeted training programs for these sectors.8 Of course, broad-based growth in educational attainment among workers can also enhance productivity growth over time.


If supply-driven price inflation subsides soon, despite the Ukrainian War, and even if prices stabilize at a high level, there could still be enough tightness in the labor market to generate job growth. real wages. Of course, this also assumes that the Fed’s new interest rate growth policy can succeed without causing a “hard landing”, in the form of a (potentially severe) recession. And wage growth itself should not be a major cause of inflation.

Large nominal wage increases currently reflect tight labor markets (plus productivity growth), driven by the following:

  • Declining labor force participation, primarily among older workers (55+) who had left the workforce (although many are now returning) and women who have provided necessary care for other family members;
  • Increases in quits, especially in low-wage jobs, as workers are more dissatisfied with conditions at their previous jobs; Y
  • Increases in what economists call workers’ benefits reserve wages – the lower wages they will accept in new jobs – which broaden their job searches and add to job vacancy rates.

The increased dissatisfaction that workers now seem to feel in low-wage jobs is not a bad way to pressure employers to improve wages and working conditions, especially if it lasts.9 And a declining labor force share among older workers, even if temporary, was perhaps inevitable, given the rise in the value of their assets in recent years. But the drop in participation among working-age workers and especially women could be offset by family-friendly policies such as more childcare and paid leave.

And, while declining labor force participation probably adds to the tightness of the market that raises wages, it has significant costs. First, nonparticipation precludes employment and income that these potential workers would otherwise enjoy; second, it is likely to contribute to price inflation, especially by creating bottlenecks for workers in key industries (such as transportation and logistics); and third, it also reduces tax revenues that could finance needed services.

Our best hope of achieving higher real wages while reducing inflation and boosting employment would be to increase labor force participation (with family-friendly policies) and education/training to improve worker productivity and wages. over time. To train short-term workers for new jobs in sectors like construction, manufacturing, or health care, we must expand sector training programs for those sectors. In fact, recent evidence (Holzer, 2022) suggests that such training can be very effective in increasing workers’ earnings. And giving workers better information on job openings and wages, to help them move into high-demand/high-wage sectors, can also go a long way toward increasing their wages.


Albanesi, Stefania, and Jiyeon Kim, 2021. “Effects of the Covid-19 Recession on the US Labor Market: Occupation, Family, and Gender.” Economic Outlook Magazine, vol. 35, no. 3.

Domash, Alex, and Lawrence Summers. 2022 “How Tight Are US Labor Markets?” National Bureau of Economic Research Working Paper No. 29739.

Deloitte, 2021. “The US manufacturing skills gap could leave up to 2.1 manufacturing jobs unfilled by 2030, according to a study by DeLoitte and the Manufacturing Institute.”

Groshen, Erica, and Harry Holzer. 2021. “Labor Market Trends and Outcomes: What Has Changed Since the Great Recession? Annals of the Academy of Political and Social Sciences. vol. 695, no. one.

Hershbein, Brad, and Harry Holzer. 2021. “The evolving impact of the Covid-19 pandemic on the labor market: who has been hurt and what we must do.” IZA Discussion Paper.

Holzer, Harry. 2022. Do Sectoral Training Programs work? What the evidence about Project Quest and Year Up really shows. Policy Brief, Economic Studies, Brookings Institution.

Howard, Sean et al. 2022. “Real wages grew during two years of Covid-19 after controlling for the composition of the labor force.” Federal Reserve Bank of Dallas.

Sheffield, Liz 2019. “Construction Grows, But Baby Boomer Retirement Leaves Gap.” ADP.

Stansbury, Anna, and Lawrence Summers. 2017. Productivity and payment: is the link broken? National Bureau of Economic Research Working Paper No. 24165.

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