MainStreet Macro: Show me the money!

One of the most iconic movie lines ever delivered has to be this gem from Jerry McGuire: “Show me the money!”

And if you follow headlines on the job market, that’s exactly what workers have been telling their employers.

Wages and their growth since the pandemic have drawn the attention of Wall Street investors, Main Street businesses, and Federal Reserve policymakers. 

ADPRI’s Third Quarterly Workforce Vitality Report (WVR), released last week, provides an in-depth analysis of wage trends. The work is based on anonymous and aggregated data derived from about 250,000 U.S. employers and approximately 18 million private-sector U.S. workers.

Here are four things we learned from the WVR in the third quarter of this year.

Wage growth is returning to normal.

The decade leading up to the pandemic was the longest economic expansion in U.S. history.  Yet wages were sluggish during that period, with annual growth averaging just 2.7%, much lower than the average 4.1%  growth we experienced over the past 50 years, according to the Bureau of Labor Statistics (BLS).

But since the pandemic, wages have had a heck of ride. In May 2020, year-over-year wage growth peaked at 7.3%, according to ADP data. The surge was due largely to the fact that so many low-paying, service-sector jobs were lost, which made wage growth artificially high.

As the economy recovered, the hard-hit service sector regained those lost jobs.  As a consequence, wage growth decelerated, hitting a low of 1.5% in the second quarter of this year.

Now, wages again are on the move as labor shortages and a shrunken workforce force firms to raise salaries to attract and retain people.

Wages grew by 3.3% in September, down from the 5.3% annual growth reported during the same month last year. OK? September’s increase in wages was in line with growth in the months leading up to the pandemic, but far short of current inflation.

Job switchers are notching the biggest pay gains.

For most workers, switching jobs last month definitely paid off.  For them, wage growth averaged 6.6% in September, up from 5.1% in the first half of the year, our data show.

Finance, information, and professional business service employees bagged the biggest gains from changing jobs last quarter.

One reason is these industries more easily adjusted to remote and hybrid work. Office location became less of a barrier to employment, giving workers more negotiating power. Employers suddenly had more competition for talent.

New entrants to the labor market saw the lowest wage gains, at 2.5% in September down from 6.9% at the beginning of the year.  New entrant wage growth was also topping 6% in the 8 months before the pandemic hit.

Leisure and hospitality workers are still coming up short.

Of all the sectors upended by the pandemic, leisure and hospitality was the hardest-hit and has had the most uneven recovery.  At the beginning of 2021, the sector led job creation, boosting employment by over 1.6 million jobs, according to the BLS.

That recovery came to a screeching halt in the third quarter, however, as concerns over the delta variant caused Main Streeters to spend less at restaurants, bars, and other high-contact establishments.

Wage growth in the sector has swung dramatically over the last 18 months. ADPRI data shows it’s now positive again, growing 1% in September after shrinking in four out of the five previous months. 

Job holders had the biggest pay gains, notching a 6.8% increase in September. Job switchers, by contrast, saw their wages barely budge. For them, wages grew just 0.4% from the previous year.

With the industry still struggling under the weight of the pandemic, employers in this sector seem intent on retaining employees and are willing to pay them more.

Gender makes a diffence

Wage data gives more evidence of the job recovery’s disproportionate impact on women.

Among men, labor force participation has fallen 1.5 percentage points since the pandemic began, reaching 67.7% in September down from 69.2% in February 2020, according to the BLS

For women, labor force participation has shrunk even more, hitting 55.9% in September from 57.8% before the pandemic.

Yet when it comes to wages, women have fared better. In May, wage growth hit a pandemic low of roughly 1% for both men and women according to ADPRI data. But in September, wages for female workers rose 4.5%, compared to a 2.4% increase for men.

Now, as every statistician knows, growth is faster when the starting point is lower. Women make only 81% of what men make. Their average take-home pay was $27.66 an hour, compared to $34.13 for men in September.

That gap holds — and even worsens in some cases — across industry, tenure, seniority, age, and region.

My Take

To rebuild and retain their post-pandemic workforce, employers are being forced to pony up.  For some, that means boosting pay and bonuses. For others it means offering non-cash benefits such as flexible schedules, childcare support, health insurance, mental health resources, skills training, professional development, and remote and hybrid work arrangements. 

In short, the lesson from Jerry McGuire still holds. Money is important.

Footnote: With inflation soaring to 5.4% in September, real wages — your paycheck adjusted for price increases– shrank for almost everyone.