The labor market is turning out to be a new source for optimism in the Federal Reserve's fight against inflation. Worker shortages that drove up wages during the pandemic and in the economic reopening are fading. It might not amount to a labor glut, but we at least have new areas of employment stability in some industries.
While the overall labor market remains strong, it also now appears that worker pay in these industries may have overshot the fundamentals. That's leading to a growing prospect that wage growth for certain jobs is going to stagnate for a while. It's not great news for people employed in warehouses or hospitality businesses, but it offers up more hope that the elevated inflation the country has experienced over the past 18 months will normalize quickly.
Amazon.com, as I've written before, continues to be a good reflection of the country's labor market dynamic. In its quest to meet growth targets, Amazon went on a hiring spree in 2021 that drove up wage growth not just in the warehousing industry, but in related industries like manufacturing and transportation, where employers were competing for similar kinds of workers. Because Amazon is such a big employer, it almost single-handedly pushed average hourly earnings up almost 17% in 2021 for warehousing and storage workers.
Then at the end of April the company said it was finding itself overstaffed as Americans’ spending began to shift from goods back to services — a sign that wages for warehousing workers were set to slow. We now have wage data for warehousing and storage workers through May: year-to-date wages in the industry are essentially unchanged from December in nominal terms, and deeply negative in real terms that account for inflation.
This hasn't led to net layoffs in the industry — warehousing and storage employment has grown by more than 100,000 workers in 2022 — it's just that the wage growth we got in 2021 appears to have been too high. So the rebalancing we’re getting in 2022 is continued employment growth, but with wages declining in real terms until we hit some sort of new equilibrium.
Something similar appears to be happening in the leisure and hospitality industry. Wage growth soared in 2021, clocking in at 16.6%, but has slowed noticeably in 2022. In June, wages in the industry grew at just a 2.7% annualized rate, below the rate of inflation and signaling that the industry has caught up on staffing after a frantic year of hiring. Meanwhile, leisure and hospitality employment has grown by 550,000 in 2022, suggesting that here, too, the adjustment is playing out as continued employment growth with declining real wages.
The formerly red-hot housing industry could be next. In a Twitter thread on the state of the housing market in various metros, Rick Palacios Jr. of John Burns Real Estate Consulting noted that builders in several metros like Boise, Idaho, expect labor costs to fall in the coming months as the market adjusts to the slowing pace of activity.
We've already seen prices moderating in other areas of the economy that contributed to rising inflation: used vehicles, freight, and more recently commodities prices. But the concern has been that an overheating labor market would be the trickiest area to contain without having a recession. Some economy watchers feared that wage momentum would take on a life of its own, like a roaring fire, and the only way to slow it down would be to douse it with water — a recession.
For at least some of the industries that experienced the fastest wage growth last year, that doesn't seem to be the case. As staffing in the leisure and warehousing industries has caught up to demand, wage growth is stalling out. Maybe it’s just a short-term trend, but it's worth watching.
It’s important to remember how nothing about this pandemic economic cycle has been typical, including the labor market. Double-digit wage growth for restaurant and warehouse workers in 2021 wasn't normal, and we shouldn't expect stagnant wage growth to persist, either, when the unemployment rate is 3.6%.
Consider it another piece of evidence that inflation really can normalize with a little help from monetary policy. As various parts of the economy find post-pandemic normalcy, the chances increase that we can avoid the more dire economic scenarios that people are worried about.
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