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Wages Are Rising: How Far Will They Go?

Regional Matters
August 5, 2021


While employment has been rising nationally since May 2020, it remains far below pre-pandemic levels (by about 6.8 million jobs or 4.4 percent as of June 2021), and many firms report difficulty finding workers. This difficulty has become increasingly apparent in the Richmond Fed’s monthly surveys of manufacturing and service sector businesses in our region. The “availability of skills needed” diffusion indexes, which report the difference between the percentage of firms for which it is easier to find workers than in the previous month and those for which it is more difficult, have fallen deeper into negative territory in recent months. The indexes hit record lows in May and remained historically low in June and July, indicating that a rapidly growing share of firms are finding it increasingly difficult to hire workers. (See chart below.) We received similar responses from our recent CFO survey, conducted with the Federal Reserve Bank of Atlanta and Duke University. Seventy-four percent of firms (located across the country) reported they were experiencing difficulty finding new employees for open positions. Over half of those firms (about 40 percent of total respondents) said this difficulty hiring was reducing their revenue. So, how are firms responding to this hiring challenge? Through our surveys and direct conversations with businesses, we are increasingly hearing that firms are raising wages as they search for workers.

Evidence from National Data

Recent increases in wages can be observed through national data. In June 2021 the Bureau of Labor Statistics (BLS) reported average hourly earnings of $30.40 an hour, above the pre-pandemic level of $28.51 from February 2020, and year-over-year wage growth of 3.6 percent, above the February 2020 rate of 3.0 percent.

The BLS also publishes a quarterly employment cost index (ECI), measuring the change in the cost of labor. The ECI looks at changes in employment costs within industries and occupations, making it free from influence of employment shifts among occupations and industries. Employment cost index data in the chart below show that national compensation costs (including wages and benefits) for workers rose by 0.7 percent in the second quarter of 2021, while wages alone rose by 0.9 percent. This followed strong growth in the first quarter, which saw total compensation growth of 0.9 percent and wage growth of 1.0 percent, the highest growth rates since 2007, shortly before the Great Recession.

Fifth District Wage Growth

In our Fifth District business surveys more firms have reported increasing wages than decreasing wages every month since August 2020. Furthermore, firms have reported accelerating year-over-year wage growth throughout 2021. Our July 2021 business surveys included special questions, asking firms about their expectations for wage growth going forward. Nearly 50 percent of respondents reported that they expected wage changes over the next 12 months to be greater than normal, with only 6 percent expecting them to be lower than normal.

In July, firms reported that they expected to see, on average, 7.5 percent wage growth over the calendar year 2021 and 7.1 percent wage growth over the calendar year 2022. Overall, firms’ expectations for wage growth averaged between 6.5 percent and 7.5 percent across worker skill levels in both 2021 and 2022. However, expectations varied by sector, as firms in the service sector expected to see higher wage growth, on average, than manufacturing firms. Within the service sector, firms expected to see faster wage growth for low and high skill workers than for mid skill workers. On the other hand, manufacturing firms expected to see faster wage growth for mid skill workers than for high and low skilled workers.


Across the country and the Fifth District, wage growth is rising on average. At a time when demand for goods and services is high and finding employees is difficult, many firms may feel pressure to raise wages further. In the Fifth District, about half of the firms we surveyed expect greater than normal wage changes over the next 12 months, but it remains to be seen how much and how fast wages will change. Using wage indicators, our survey data, and conversations with businesses we will continue to watch wage trends in the coming months.

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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.