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Is Wage Growth Normalizing? What Fifth District Businesses Are Saying About Wages

Regional Matters
February 28, 2024

In the past few years, firms across the nation have reported increased wages due, at least in part, to a supply of labor that cannot keep up with robust demand. Last July, we wrote about how Fifth District firms reported notable acceleration in the growth rates of both realized and expected wages. More recently, wage growth has declined, and a rising share of firms expect their wage growth for 2024 to be "about normal." However, wage growth remains above pre-COVID-19 levels. Our business surveys suggest that wage growth might remain elevated for some time.

Realized and Expected Wage Growth Continues to Recede

In 2019, year-over-year wage growth hovered between 2 and 3 percent for manufacturers and between 3 and 4 percent for services firms. Since 2020, growth in wages has picked up notably. In 2020, our services firms reported a spike in average wage growth, and then both manufacturers and services firms reported a steady increase in growth with a peak in late 2022.

Wage Expectations Returning to "Normal"

Despite the decline in realized wage growth over the past year, it remains above its pre-COVID-19 trend. However, when firms were asked to forecast average wage growth over the next 12 months, they indicated that they expect wage growth to return to near pre-COVID-19 levels.

We also asked firms how their expected wage growth compares to what they would consider "normal." The majority (57 percent) of February respondents reported that their expected wage growth is "about normal." This is a notable increase from the low of 29 percent in 2021, but not too different from the responses in the last few months. While roughly 30 percent of respondents expect wage growth to be greater than normal over the coming year, this is down substantially from its post-2020 peak of 66 percent, signaling a marked return to what firms consider "normal."

What Are Fifth District Firms Saying About Wage Growth?

Many of our respondents share anecdotes that enrich our knowledge of the regional economic environment. It has always been common for survey comments to include information about wages, but the percentage of comments that mention worker compensation increased from 5 to 6 percent during the Great Recession (2008-2009) to 10 percent in 2015, as the economy recovered and the labor market tightened. Comments about worker compensation spiked to a high above 16 percent in 2021 amid the COVID-19 labor shortages, and these comments remained elevated through 2023.

Furthermore, the way firms comment about compensation has changed over time. For example, many of the comments in the 2000s referenced changes to minimum wage laws or contracted wage increases. We began hearing more about worker shortages in the mid-2010s.

"We continue to see a shortage of qualified drivers. ... We are improving benefits and will increase wages in early 2015 to help us attract needed drivers. The increase will be in the 10% range."

— Trucking Company, January 2015

By mid-2021, businesses were more likely to comment on the unprecedented difficulty of finding workers. In many instances, companies reported increasing wages to attract and retain workers, but were still losing employees to competitors.

"Our people are getting poached by competitors and major manufacturers. We are raising wages significantly and early to attempt to ebb the flow. This is [happening] more significantly than I have seen in 34 years."

— Technology Supplier, August 2021

In recent surveys, businesses that cannot raise their own prices have commented on the effect of wage increases on business performance.

"Payroll inflation [put us in] the red in 2022, and we haven't gotten everything totally reconciled in 2023 ... if we raise our [prices] higher, people will just go online and buy."

— Outdoors Retailer, January 2024

Thus, although Fifth District business surveys suggest that most firms in our region expect wage growth to be "about normal" over the next year, anecdotes from businesses highlight that many Fifth District businesses still think about wages as they navigate the labor market.

Closing Thoughts

The labor market has been historically tight over the past several years, and many firms have increased wages to attract and retain workers. Although wage growth remains above its pre-COVID-19 levels, recent evidence suggests that growth is receding and that firms broadly anticipate it returning somewhat closer to what they consider "normal" over the next year.

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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