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Global Economic Research

Hot Labor Market: Raises, Questions

Jobs growth is welcome but defies easy explanations.

As a workplace courtesy—or, when working from home, out of respect to my family—I have taught myself to stay silent as I read and react to the daily news. But last week’s employment report showing 517,000 jobs created and the lowest unemployment rate in 54 years broke my resolve. I blurted out, “No way!”

Though the surprise was mostly good news, I was incredulous about the broad state of labor markets. How could that many jobs be filled despite reports of difficulty hiring?  How does a news cycle full of layoff announcements square with a falling unemployment rate?  With so much hiring afoot, why aren’t wage gains hotter?  These contradictions don’t have ready answers, but the Federal Reserve will have to figure things out.

The strong labor market has been a central story of the COVID recovery. The loss of 22 million jobs in March and April 2020 was staggering, as was the rapid rebound in employment thereafter. Demand for workers quickly exceeded availability of job seekers.

To entice candidates and retain workers, wages across all occupations and geographies grew. Wage gains accrued especially to the lowest wage earners. In official statistics, increases among production and non-supervisory workers consistently outpaced broader wage indices. To compete for talent, employers advertised higher and higher starting pay rates and added incentives.


Wage gains and high turnover have fueled speculation of a new era of labor power, but there are few signs of that in the aggregate. The Bureau of Labor Statistics (BLS) estimates the share of economic output accruing to workers has fallen to 56%, roughly its pre-pandemic norm. Despite headlines of labor union organization, the BLS estimated a record low of 10.1% of workers were union members in 2022.

In the most recent employment report, wage growth continued to cool, measuring 4.4% over the past year. The development is welcome; lowering this cost pressure is favorable for the inflation outlook. But if the supply of labor remains lower than demand, the risk of a new round of wage inflation is proximate.

The slower overall wage trend obscures a wide range of outcomes. Several sectors remain dislocated well after the pandemic disruption has passed.

The leisure and hospitality sector endured the greatest cost from shutdowns and social distancing. Many localities kept in-person venues closed for a prolonged period. Employment in this sector predictably cratered; today, it is one of the few sectors with employment lingering below its February 2020 level. Workers in this sector did not wait for their employers to staff up; they found other work, and are not rushing back to the service sector. High wage offers have not been sufficient to attract new workers.

Healthcare is also challenged: These front line workers faced the most strenuous working conditions at the height of the pandemic’s uncertainty. Health complications and burnout have been ongoing. And many healthcare roles require training and certification that reduce the supply of potential hires, even as wage gains exceed the rate of inflation.

The American labor market is starting the new year white hot. 


Sectors like these will set the pace for a key component of inflation: the cost of services. The Fed is keenly focused on the prices of services excluding energy and housing. Disparate fields like education, financial services, healthcare and hospitality have one key input in common: a higher reliance on labor. Wages are a greater component of these businesses’ costs, and higher wage inflation in lower-productivity sectors will put upward pressure on prices. 

Last week’s report contained one other hint of a tight labor market.  Average weekly hours worked increased by three-tenths to 34.7 hours, after more than a year of slow decline. Both goods-producing and service-providing roles ticked up. This counters the speculation of “labor hoarding:” a falling trend in hours suggested employers were resisting layoffs and keeping people on payrolls to not be left short-staffed again. If hours are rising, then workers are, well, working.

For wage pressure to slow, more workers will be needed. Evidence of slack is mixed. Currently, the BLS estimates 11 million job openings, with most sectors holding high, and only 5.7 million people unemployed. About 5% of the labor force holds multiple jobs, in line with historical norms.

We continue to monitor immigration as a potential source of relief. The healthcare and hospitality sectors are frequent destinations for recent immigrants. For fiscal year 2022, immigrant visa issuance was more than double the volume issued in 2020, but still has room to recover; evidence is accumulating that new migrants are in demand. Un-retirements may also provide some swing capacity, as labor force participation by workers over 55 remains under its pre-pandemic level.

Services that are more labor-dependent are at greater risk of continued inflation. 

Observers may be left wondering about the state of the Phillips Curve, the theory linking greater employment with greater inflation. The relationship is intuitive: higher demand for labor leads to higher wage offers, enabling workers to spend more, pushing up prices. However, the connection has often proved weak. Leading up to COVID, unemployment fell and wages rose steadily, but above-target inflation never followed. In the most recent report, the Phillips Curve would have predicted growing wages due to falling unemployment, but that was not the case.

None of these factors make the Federal Open Market Committee’s decisions any easier. Steady employment and improving inflation mean a soft landing remains possible, and the Fed will try to keep that lane open. However, the hot labor market is not welcome news to those who are tasked with moderating the path of the economy. With old rules like the Phillips Curve no longer sending reliable signals, policymakers will struggle to calibrate their next steps. 

The year ahead will help us determine what the new steady state will look like. Further surprises, of all varieties, are likely. Colleagues and families of all watchers of market data should be braced for more noisy mornings.

Ryan James Boyle portrait

Ryan James Boyle

Chief U.S. Economist
Ryan James Boyle is the Chief U.S. Economist within the Global Risk Management division of Northern Trust. In this role, Ryan is responsible for briefing clients and partners on the economy and business conditions, supporting internal stress testing and capital allocation processes, and publishing economic commentaries.

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