The labor market braces for headwinds

Prepandemic-level peaks still too far for some low- and medium-wage occupations

Within high-wage occupations, only employment in legal occupations is still lower than what it was before the pandemic. In contrast, employment in six of the nine low-wage occupations and three of the six medium-wage occupations is still lower than in February 2020. Figure 2 shows that some of the biggest gains in employment have happened in high-wage occupations. While life, physical, and social science occupations stand out in the sheer degree of employment gains (25.2% since February 2020), computer and mathematical occupations continue their trajectory of steady growth over the years. In fact, this was the only occupation that experienced growth in employment between February and April 2020.

Within medium-wage occupations, education, training, and library occupations are down 6%, while protective services are 5.3% lower than prepandemic levels. The pace of recovery in these occupations has slowed this year, as figure 3 shows. In contrast, the recovery in construction and extraction occupations is still steady, with employment up by 6.2% since February 2020.

Among low-wage occupations, the recovery in employment in food preparation and serving seems to have fizzled out since May this year, despite a steady increase in consumer spending on food services and drinking places. Contrast that to personal care and service—an occupation that suffered as badly as food preparation and serving—where the recovery is gaining ground and employment is now 1.6% above prepandemic levels (figures 2 and 4).

Wage gains fade in the face of high inflation

A strong labor market has led to robust growth in wages. Nominal average hourly earnings have gone up by 8.9% since the end of 2020. While monthly data on wages for occupations is unavailable, annual data from the Occupational Employment and Wages Statistics database shows a sharp surge in the economy’s median wage last year.⁴ Nominal median hourly wages for the economy went up by 9.1% in 2021, more than four times the average annual growth during 2010–2020. Interestingly, the sharpest rise in wages last year were in some low- and medium-wage occupations. As figure 5 shows, in food preparation and serving-related occupations, median hourly wages went up by 11.3% last year, followed by education, training, and library occupations (9.3%), and transportation and material moving occupations (8.2%).

Data from the Federal Reserve Bank of Atlanta’s wage tracker suggests that the surge in wages for low-wage occupations has mostly continued in 2023.⁵ According to the tracker, median hourly wage growth in low-skill occupations⁶ continues to outpace wage growth in mid-skill and high-skill occupations (figure 6). Figure 6 also shows that across skill levels, wage growth since the middle of 2021 has been far higher than in the past few years.

However, two worrying trends have emerged. First, as figure 5 shows, median hourly wages declined for nine occupations in 2021, three of which were in medium-wage occupations and three in low-wage occupations. While the sharpest decline was in two high-wage occupations—management (-6.7%) and architecture and engineering (-4.0%), the decline in wages for other occupations works against bridging the income inequality gap. Second, high inflation has offset nominal gains in wages. Real median hourly wages,⁷ for example, declined for 14 occupations in 2021—four in high-wage occupations, four in medium-wage occupations, and another six in low-wage ones. That trend is likely to have continued into this year as inflation has remained relatively high. Real average hourly earnings, for example, have gone down by 2.4% so far this year, despite a 3.8% rise in nominal earnings.

Any economic slowdown in 2023 will dent the labor market

While high inflation has dented real wages, the biggest threat to the labor market is from a slowing economy—more so for certain low-wage occupations that are yet to reach prepandemic levels of employment. For example, if consumers cut back on discretionary spending due to souring economic prospects, that may thwart the recovery in occupations like food preparation and serving, and sales. In certain sections of the economy, these risks are already taking shape. Housing is one example where housing starts and home prices have been falling as surging mortgage rates hit demand. Deloitte economists expect real investment in private housing to contract by 9.3% this year and by 8.8% in 2023, according to their baseline forecast.⁸ This will likely weigh on employment in construction occupations.

A recession, however, will make it much worse for the labor market. In Deloitte’s recession scenario—probability of 35%—average monthly employment for the economy is forecasted to contract in 2023 and unemployment to rise to 5% from 3.6% this year.⁹ For now, slower employment growth next year is the best one can hope for given current economic trends—a scenario that’s already playing on consumer sentiment. Consumers’ expectations of the future have fallen, even while their confidence about the present situation remains relatively elevated.¹⁰ Signals such as those are probably enough to keep economists awake at night.