Main Street Macro: Jobs aren’t everything

By several measures, the job market is starting to look like its pre-pandemic self. Openings are marching resolutely downward. Fewer people are quitting. Unemployment is still low.

Recently, we learned that the labor market is generally doing pretty well in aggregate (see the ADP National Employment Report, and the Bureau of Labor Statistics household survey and establishment survey).

But jobs aren’t the whole story, not by a long shot. Wages link the job market to inflation, and while hiring might be normalizing, pay patterns are changing dramatically.

Today’s issue of Today at Work, a quarterly publication from ADP Research, looks behind the topline job numbers. Armed with the pay data of more than 25 million people, or about one-sixth of the U.S. workforce, we identified pay trends that are shaping the economy.

Geographic shifts: Pay’s long-distance remake

One of the biggest changes in the workplace has been the increase in remote and long-distance work. The number of people reporting to managers in distant metros has grown dramatically since the pandemic and shows no sign of slowing. These cross-metro workers accounted for 23 percent of the U.S. workforce in February 2020. By June 2023, their share was more than 31 percent.

In aggregate, the effect of long-distance work on pay is staggering. People who stayed with their employer but moved to a cheaper location saw a nearly 3 percent drop in pay relative to team members who didn’t move, our research found.

On the other end of the spectrum, people who took new long-distance jobs were paid, on average, 16 percent more than people who stuck to local employment. It might be worthwhile for employers to buy local, but it’s not always worthwhile for employees to work locally.

Occupational shifts: Software developers

Five years ago, “software developer” would have made almost any list of in-demand jobs, with skilled employees commanding big salaries and coveted perks. But the fortunes of software developers have changed, and the United States now employs fewer of them than it did in 2018.  

We tracked more than 75,000 software developers and engineers at 6,500 companies between January 2018 and January 2024. Their ranks peaked in January 2019 and have been falling since.

During that same period, median base pay for developers grew by 24 percent while pay for total U.S. workers grew 30 percent. Still, developers remain well compensated, earning more than double the U.S. median salary.

The changing fortunes of software developers is just one example among many of the big occupational changes that have occurred over the past four years.

Distributional shifts: The growing pay gap

Supercharged pay growth has been a defining factor of the labor market since the pandemic. As the economy rebounded from unprecedented job loss, rapid-fire hiring led to double-digit pay gains.

The lowest earners, those in the bottom 25 percent, had the largest percentage growth in pay over the past three years. But workers at the top of the pay distribution benefited more because the dollar amount of their pay increases was greater.

For that reason, the gap between the highest and lowest earners widened by 5 percentage points, or more than $12,282, to $116,954 between 2021 and 2024.

Our data suggests a scenario in which prices go up in response to pay increases at the bottom of the distribution, while pay growth at the top of the distribution encourages more discretionary spending. This combination might have contributed to higher-for-longer inflation.

Seasonal shifts: The good and bad of summer jobs

To see what summer might hold, we examined 1.2 million monthly new U.S. hires and found strong demand for seasonal workers by hotels and other hospitality providers.

Other segments target young workers for seasonal summer employment, too, including retailers, warehouses, and transportation companies. In fact, while hiring overall has slowed, more young workers were hired in every sector in May than a year ago.

Hot seasonal hiring typically is accompanied by sizzling summer pay growth. Between May 2019 and May 2022, hourly wages were up 33 percent for workers 16 to 22. For workers 23 to 66, pay gains were 22 percent.

Wage growth was strong until it wasn’t. For the last two years, median hourly wages have stalled out at $17.

My take

In 2022, during peak inflation, I was asked what data point was most important for the economy: Jobs or inflation. Because the economy is always hitched to the labor market, I said jobs.

Last week’s job and inflation data culminated in yet another highly anticipated Fed decision. But the data didn’t move the needle. The Fed decision was to wait and watch.

All economic indicators are important to a data-dependent central bank. But how companies hire and what they pay will be the biggest test of the Fed’s patience on inflation.

The week ahead

While the labor market has more than held its own in the face of higher rates, consumer spending, industrial output, and housing all have been weathering higher rates with varying degrees of success. We’ll get data on all three this week.

Retail sales, the Census Bureau’s read on consumer spending, will be released Tuesday under a shadow cast by Friday’s downbeat consumer data from the University of Michigan. Bad consumer vibes aren’t necessarily a deal-breaker, and consumer spending has been remarkably resilient. But there’s evidence that higher prices are starting to take a toll.

This week also delivers indicators on U.S. manufacturing, with data from the Federal Reserve Bank of New York, the Bank of Philadelphia, and S&P Global’s Purchasing Managers Index. The U.S. service economy has been the focus of the Fed’s inflation battle for the last few months, but rate-sensitive manufacturing is an important barometer.

Housing starts and existing home sales complete the week’s data picture. Housing is one of the most rate-sensitive parts of the economy, but a decades-long inventory shortage has made this once-reliable channel of monetary policy less effective as a vehicle for lowering inflation.