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Wage growth to soften

April 20, 2021

average time to full recovery of recessionary employment declines by major industry group chart

Source: Bureau of Labor Statistics

The White House released a study over the weekend showing that average hourly earnings growth could turn negative on a year-over-year basis this month and remain weak through the remainder of 2021. This shouldn’t be controversial – wage growth soared last year due to compositional effects (job losses were disproportionately large in lower wage categories) that are now reversing – and the administration’s analysis is likely even understating the potential downside here, as it assumes that the economic recovery will be evenly distributed over the remainder of the year. Even in normal times, however, leisure and hospitality jobs, which currently sport average wages more than 40 percent below the private sector norm, tend to bounce back much more rapidly than those in higher-pay sectors such as information services, mining, and construction. Leisure jobs are not as readily destroyed through technological advancement as those in other industries on balance and therefore tend to retrace their recessionary declines in relative lockstep with the rebound in the economy more broadly. It is in part for this reason that the growth rate in average hourly earnings tends to decelerate in the early portions of expansions before perking up again in the middle to latter stages. This effect should be significantly amplified in this cycle given the lifting of business restrictions and what is shaping up to be a rather swift return to normal. Like so much in this COVID-skewed economy, reported wage growth is going to look dramatically different in the months ahead than it did in 2020.

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