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Speaking of the Economy
Speaking of the Economy - Renee Haltom and John O'Trakoun
Speaking of the Economy

Aug. 11, 2021

Are Employers Paying Enough?

Audiences: Economists, General Public

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Renee Haltom and John O'Trakoun explore recent wage inflation within the context of the short-term challenges of hiring workers in certain industries as well as longer term trends in income growth. Haltom is vice president and regional executive and O'Trakoun is a senior policy economist at the Richmond Fed.


headshot of Renee Haltom

Renee Haltom

Regional Executive


Charles Gerena: I'm Charles Gerena, online editor for the Research Department at the Federal Reserve Bank of Richmond.

Thank you for listening to "Speaking of the Economy." If you missed any of the episodes since we launched last fall, you can find them on the Richmond Fed's website or Apple Podcasts.

As the economy tries to recover during the COVID-19 pandemic, why is it so hard for so many businesses to find workers? Many pundits have answered this question with another question: "Are employers paying enough to bring people back into the workforce?" In this episode, we'll explore the recent surge in wages within the context of longer-term trends in income growth.

My guests today are Renee Haltom and John O'Trakoun. Renee is vice president and regional executive at our Richmond office. She engages with business, banking, and community leaders throughout Virginia on national, regional, and local economic conditions to inform the Richmond Fed's monetary policymaking process as well as share information about the Federal Reserve System. John is a senior policy economist who tracks the national economy. He recently launched Macro Minute, a weekly look at the numbers beyond the headlines on the macroeconomy.

Thanks for being here, Renee and John.

Renee Haltom: Good to be here.

John O'Trakoun: Good to be here. Thanks, Charles.

Gerena: Let's start by taking a step back.

Most of us think about income as the money that we get in our paycheck every month. But economists have different ways of looking at it, right? For example, they may include transfer payments like food stamps or track employee wages as a percentage of a corporation's income.

What are the different ways you look at income, and what does it tell you about the state of the economy?

O'Trakoun: When we economists study personal income, we look at it from a kind of accounting perspective using data that comes from the Bureau of Economic Analysis. From that perspective, personal income includes employee compensation — that's stuff like wages and salaries and things like employer contributions to benefits. It also includes things like income that people get from owning businesses, income that comes from renting property, and also other types of interest and dividend income that you get from investments.

The kind of income that we had a lot of attention on during the COVID pandemic is transfer payments, because lawmakers have enacted over $5 trillion across six major bills. That was intended to help businesses and households address the economic pain of COVID. And $807 billion of that has gone directly to households in the form of three rounds of economic impact payments.

While the total amount of income matters in terms of how much people can spend, the breakdown of income growth really matters, too, between the kind that comes from government social transfers and income from other sources like employee compensation. It can tell us how sustainable the recovery is and to what extent people are still dependent on transfer payments to keep up their level of spending.

Gerena: There was a fair bit of press coverage about sluggish income growth in the U.S. following the Great Recession of 2007 to 2009. What has income growth looked like more recently, and what did it tell us about where the economy was heading before the COVID-19 pandemic?

O'Trakoun: If we look at the five years right before the pandemic, from 2014 to 2019, personal income grew at about 4.5 percent per quarter on an annualized basis. And the five years before that, from 2009 to 2014, personal income was growing less than 4 percent per quarter. Also, some government social benefits as a share of income declined over that period of time. It fell from 18.4 percent at the beginning of 2010 to 16.6 percent at the end of 2019.

That tells us that income growth was accelerating and the economy was doing really well just before the economic shock of COVID. It's something we see in other statistics as well like the unemployment rate, which reached a 50-year low of 3.5 percent.

Gerena: What happened with income growth during the pandemic?

O'Trakoun: This pandemic has been a really different type of recession. During the Great Recession, for example, personal income fell about 4.8 percent from its peak to the end of the recession in 2009. It took a long time — 10 quarters — for the economy to go back to the old peak.

The COVID recession was a completely totally different story because there was so much fiscal support to households. It made it so that personal income never fell below the pre-pandemic level. It actually increased almost 8 percent during the second quarter of 2020. As of June 2021, income was almost seven and a half percent above the level that it was in February 2020 before the pandemic hit.

That income boost made it possible for households to spend. When you focus on wage and salary income by itself, it fell over 10 percent during the early stage of the pandemic and it took nine months to get back to the pre-pandemic level. Now, wage and salary income is back to its pre-pandemic growth trend and that's partly thanks to a pretty strong recovery in jobs, even though we're still down from the pre-pandemic level. The recovery has been fast compared to the Great Recession. It's also partly because of higher wages, and we've been hearing a lot about that in the news.

Gerena: Thank you for that data, John. It was a very helpful overview.

Renee, what are the Richmond Fed's business contacts telling us?

Haltom: What John said definitely matches what we're hearing from businesses.

By way of background, throughout the pandemic we spent a lot of time talking with business owners and managers across the Fifth District to track the economy. Businesses provide a much more current view of things, especially in a pandemic when things are evolving very quickly. We also get input from our business surveys.

We've heard a lot more rumbling about wage pressures in 2021. Businesses have complained about challenges finding workers as soon as we got past the initial extreme shutdowns of March and April 2020. This was really across the board, though it was most intense at the low-wage end of the labor market.

I remember some conversations I had last fall that stuck out to me. An industrial staffing firm said they usually get 20 to 50 people applying for jobs every day, but late last year they had some days with zero new applicants. Or, a large retailer said they couldn't get distribution center workers because of competition from e-commerce. A health system noted that mothers had been especially hard to get back to work and that is a sector that disproportionately employs women. I talked with several firms who started offering childcare or virtual schooling on site so their working parents could come back. Even restaurants and hotels in beach areas were having a really hard time hiring. Many told us that that was forcing them to limit hours, holding back their recovery.

There were a few exceptions to the difficulty in hiring, such as a rural industrial manufacturer who attributed it to being in a rural area. But the challenges were pretty widespread.

Wage pressures started to feel more prominent in 2021 as businesses started to ramp up hiring again in expectation of the vaccine opening the economy back up. Unfortunately for employers, many workers had left the labor market and seemed reluctant to come back. The next natural question is whether wages are going up and we've heard that from businesses, pretty much in line with the data John talked about.

Gerena: How much of this upward pressure on wages is due to continuing pressure on policymakers at the state and federal level to raise the minimum wage? After all, the last time the United States increased the minimum wage was more than a decade ago in July 2009.

Haltom: We started hearing a lot more from businesses about the minimum wage earlier this year. The incoming Biden Administration, if you recall, announced a $15 minimum wage as a policy priority and some regions, like the state of Virginia, passed hikes. We started hearing stories like businesses raising wages preemptively to get ahead of the government, whether that was because they saw it as a positive signal to send to scarce workers or because they saw a higher minimum wage as inevitable and wanted to phase it in to ease the impact.

Perhaps it's a coincidence, but around the same time we started hearing about wage pressures more in earnest. It could be that talk of a national $15 minimum wage changed workers "reservation wage" — that's a concept in economics that is known as the lowest wage at which a person would be willing to work. Or businesses may have started to ramp up hiring in anticipation of a vaccine opening the economy up and that created more competition for scarce workers. I think you had a little bit of both going on.

Another factor that businesses mention is that some sectors really boomed during the pandemic and went on a hiring spree, namely anything having to do with e-commerce. Many of those jobs pay relatively high and we here are now setting the market wage in some regions and markets.

Either way, a major theme from businesses in 2021 has been the shortage of workers and pressure on wages, especially at the lower end.

O'Trakoun: Yeah, that's interesting. We're definitely hearing a lot of anecdotal evidence that workers' expectations for wages have increased.

But some of it appears in survey data as well. The New York Fed's Survey of Consumer Expectations, it asks job searchers the lowest wage they'd be willing to accept to take a new job. That minimum level has grown by 26.5 percent since the end of 2019.

Gerena: As employers try to bring people back into the workforce and onto their payrolls, is a little wage inflation now such a bad thing?

O'Trakoun: I don't think we should characterize the wage growth we're seeing as a bad thing. It's just the market at work. It's trying to find the right price to balance the demand for workers with the supply.

Right now, both employers and workers are trying to figure out the right wage to compensate labor in light of factors like the health concerns of the pandemic, changes to the way that we work, the background of fiscal support, and also changing expectations for what a minimum wage should be. Some of those things might be temporary, but some of them might end up being permanent.

Today, with labor demand really high relative to labor supply, workers have the ability to be choosier about which kinds of jobs and wages to accept. That is a position that many workers, especially those at the low end of the wage scale, might not have found themselves in before.

This could be a good thing because, as sloppy as the process is right now, if it ends up in a place where workers and employers match up in a way that really works for them, they become more productive, and that could allow the U.S. economy to grow even stronger in the long run.

Gerena: Some people are concerned that the supplemental unemployment benefits available during the pandemic are discouraging people from working — why accept a minimum job when you can get more from your "Uncle Sam"? What are the Richmond Fed's business contacts telling us? What is the data telling us so far?

Haltom: For the duration of the pandemic, concern about unemployment insurance has been a consistent theme that we've heard about from businesses. The initial idea behind the supplement benefits was to make it possible for people to stay home and socially distance. However, even early on in the pandemic at the initial shutdown phases, there were some sectors that still needed essential workers and the concern was that the more generous benefits would keep people home. That concern from businesses has only continued as they've tried to bring back furloughed workers or add new jobs to meet demand.

From my perspective as an economist, there certainly is some truth to the idea that unemployment insurance makes it easier for potential employees to stay home. But I do think the story is more complicated than that.

First and foremost, we're still very much in a pandemic. There are a heck of a lot of people who remain concerned about that, particularly in high-touch occupations. Second, child and dependent care remains a huge issue, with schools and other facilities closed or out of business.

I also think it's worth acknowledging that the pandemic has been stressful and none of us has had the comforts we're used to. At the same time, family and job responsibilities have risen for many people. Meanwhile, we have a vaccine and we can finally do some things in public again. So, I think there is a contingent of people simply choosing leisure over work now and are waiting until the fall to come back to the labor market. All that together is a bunch of reasons to stay home and fiscal policy and added unemployment benefits are making that a little more possible.

This points to the idea we mentioned a few minutes ago that the reservation wage seems to have gone up. It seems like some workers are simply choosier, as John said, now about the jobs that they're willing to take and it would take a higher wage or potentially more desirable working conditions to come back.

O'Trakoun: I'll add that about half of states have ended participation in enhanced federal unemployment benefits over the course of June and July. So far, the data are a bit mixed over whether there's been evidence that it's helped employers when it comes to addressing labor shortages.

But there is evidence that workers might be more reluctant to return to these lower-paying jobs. Industries like arts, entertainment and recreation, and accommodation and food services are having some of the toughest time right now getting workers and they also rank lower in terms of average hourly earnings.

Gerena: It definitely seems to be something you can confirm just seeing all the "Help Wanted" signs at those kinds of businesses.

O'Trakoun: For sure.

Gerena: Looking ahead, what will you be looking for in terms of wage inflation?

O'Trakoun: Wage inflation is really important to monitor because it tends to be sticky. Once wages go up, they usually don't come back down. And growth in wages might reflect workers' expectations in the future and those expectations could cause broader inflationary pressure.

As we track the wage data going forward, I'll be monitoring whether wage growth becomes broad-based — so not just affecting low-skilled and entry-level jobs but also spreading to higher-skilled and management-level jobs and also the extent that it spreads out across industries, not just in leisure and hospitality, for instance, but also spreading through to construction, manufacturing and other types of industries.

Haltom: The only thing I'd add is that it will be very interesting to watch this play out in the coming months.

We've already seen businesses respond to this crazy labor market by raising lower-end wages [and] also doing things like investing in making themselves a better employer or offering things like signing bonuses to bring workers on board. We're also seeing more and more businesses say that they're going to pull the trigger on automation to make do with challenges finding workers or, in some cases, that the labor has gotten more expensive.

As John mentioned, there's still a lot to be determined both on the labor supply side and the labor demand side. In the next few months, you're going to have schools opening up, summer ending, expanded unemployment benefits expiring, and the vaccine hopefully continuing to do its work. We're on the precipice of seeing which parts of the economy go back to pre-pandemic patterns and which will find a "new normal."

Gerena: John and Renee, thank you so much for sharing your insights on where income growth and wage inflation are these days. We'll see what happens in the rest of this year.

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