The recovery since the onset of the pandemic has been characterized by a tight labor market and rising nominal wage growth. In this post, we look at labor market conditions from a more granular, sectoral point of view focusing on data covering the nine major industries. This breakdown is motivated by the exceptionality of the pandemic episode, the way it has asymmetrically affected sectors of the economy, and by the possibility of exploiting sectoral heterogeneities to understand the drivers of recent labor market dynamics. We document that wage pressures are highest in the sectors with the largest employment shortfall relative to their pre-pandemic trend path, but that other factors explain most of the wage growth differentials. We suggest that one key factor is the extent of physical contact that has had to be compensated for by offering higher wages. One implication of our analysis is that, as COVID-related factors recede, sectoral imbalances could be restored from the supply side as employment recovers back toward the pre-pandemic trend.
We focus our analysis on the NAICS industry breakdown of the following sectors: construction, manufacturing (goods-producing industries), trade, transportation, and utilities, information, financial activities, professional and business services, education and health services, leisure and hospitality, and other services (service-providing industries). We then collect data on the real and nominal Employment Compensation Index (ECI) from the Bureau of Labor Statistics (BLS) at a quarterly frequency, number of jobs opening data from the Job Opening and Labor Turnover Survey (JOLTS) and number of unemployed and employment data from the Current Population Survey (CPS) from the BLS at a monthly frequency for the sectors mentioned above starting from December 2000 to the most recent observation (June 2022).
We first document labor market tightness by using the unemployed people per job opening ratio as a measure of labor market conditions (see for example Domash and Summers (2022)). According to this metric, all sectors are now at ratios that are signaling tighter market conditions relative to the pre-COVID period except for construction. Moreover, service-providing industries have seen higher wage growth than goods producing industries. For example, as of the second quarter of 2022 annual wage inflation in leisure and hospitality was 66 percent higher than that of manufacturing.
We explore the link between nominal wage growth and labor market indicators by conducting a simple regression analysis. We regress nominal year-over-year ECI wage growth on the unemployed per opening measure of labor tightness at the sectoral level and on the four-quarter moving average of lagged year-over-year CPI inflation to check the relationship between sectoral wage inflation and past CPI yearly inflation. A negative coefficient on the labor tightness implies that less unemployed per job opening, that is, more labor market tightness, is associated with inflationary pressures on nominal wages. The sample period is from the fourth quarter of 2000 to the second quarter of 2022 for manufacturing, construction, and finance; from the first quarter of 2002 to the second quarter of 2022 for all other sectors. We use a COVID dummy at the sectoral level that applies from the starting point of the pandemic (from the first quarter of 2020 onward) to isolate specific pandemic factors that affect sectoral labor markets. As mentioned above, one example of these factors is the extent to which a sector is exposed to physical contact. . . .
Conclusions: We look at the status of labor market conditions from a sectoral point of view. While labor market indicators point at tight sectoral labor markets, the employment level in almost all the sectors is still below the pre-pandemic trend. The heterogeneity at the sectoral level in terms of wage growth, labor market tightness and employment level suggest that the recent acceleration in nominal wage is associated with pandemic specific factors. Our analysis suggests that the rebalancing of the labor market could be restored from the supply side as employment return towards pre-pandemic levels rather than the demand side by reducing the number of vacancies.