As the U.S. economy roars back to life, new analysis from Bank of America suggests wages are likely to climb higher in the near term thanks to mismatches between supply and demand for workers.
Employers are desperate to staff up quickly to meet surging consumer demand, but some workers have been slow to return for a number of reasons including virus concerns, childcare constraints, early retirement and more generous federal unemployment benefits, BofA senior U.S. economist Joseph Song wrote in a Friday research note.
It’s already clear some workers are holding out for higher pay before they reenter the workforce: The average self-reported reservation wage—the lowest wage a worker says they will accept to start a new job—has grown 21% since the fall for people earning less than $60,000 per year, according to data from the New York Fed.
According to Song’s analysis, wage growth will be stronger in sectors that were hit hardest by the pandemic—including construction, real estate and hotels and food service.
Those are also the industries that tend to employ more workers at the lower end of the income spectrum. The mismatch in the labor market will abate later this year once the reopening boom abates and more Americans return to work, according to Song, which will lessen the upward pressure on wages.
Crucial Quote
“The current labor shortage should sort itself out by the fall as growth normalizes to more sustainable levels and more workers return to the labor force as health concerns subside and generous UI benefits expire by September,” Song wrote. That means wage growth could slow down a little as employers pull back on pay following big wage hikes this year and once they no longer need to compete with a $300 weekly federal unemployment supplement.
What To Watch For
Next year, Song expects wages to rise again when unemployment reaches prepandemic levels, though that growth will be driven by “better labor market fundamentals” rather than transitory factors like the pandemic and enhanced government unemployment benefits.
Big Number
4.2%. That’s the unemployment rate Bank of America is predicting for the end of 2021, down from 6.1%. It expects unemployment will fall even further to 3.5% at the end of 2022.
Key Background
Companies are already beginning to raise their wages to attract more workers as they reopen. Amazon is raising its average starting wage to $17 per hour and McDonald’s plans to raise its average starting pay at company-owned stores to $15 per hour by 2024. Chipotle said earlier this month that it will raise its average wage to $15 per hour by the end of June. Under Armour said Wednesday that it is hiking its minimum wage from $10 to $15 per hour, and Bank of America itself announced this week that it would raise its U.S. minimum wage to $25 per hour by 2025.
Tangent
As big businesses hike pay, the Wall Street Journal reported Thursday that some small businesses are struggling to remain competitive. The chief client officer at a St. Louis office furniture dealership told the Journal that he has had to raise wages in order to fend off competition for workers from larger companies including Amazon.
Further Reading
Could Covid-19 Worker Shortages Create A $15 Minimum Wage—Even Without A New Law? (Forbes)
At Least 21 States Dropping $300-A-Week Federal Unemployment Benefits (Forbes)
I’m a breaking news reporter for Forbes focusing on economic policy and capital markets. I completed my master’s degree in business and economic reporting at New York University. Before becoming a journalist, I worked as a paralegal specializing in corporate compliance
Source: Labor Shortage Will Push Wages Higher, According To Bank Of America
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The Macroeconomics of Labour Markets
The labour market in macroeconomic theory shows that the supply of labour exceeds demand, which has been proven by salary growth that lags productivity growth. When labour supply exceeds demand, salary faces downward pressure due to an employer’s ability to pick from a labour pool that exceeds the jobs pool. However, if the demand for labour is larger than the supply, salary increases, as employee have more bargaining power while employers have to compete for scarce labour.
The Labour force (LF) is defined as the number of people of working age, who are either employed or actively looking for work (unemployed). The labour force participation rate (LFPR) is the number of people in the labour force divided by the size of the adult civilian non-institutional population (or by the population of working age that is not institutionalized), LFPR = LF/Population.
The non-labour force includes those who are not looking for work, those who are institutionalized (such as in prisons or psychiatric wards), stay-at-home spouses, children not of working age, and those serving in the military. The unemployment level is defined as the labour force minus the number of people currently employed. The unemployment rate is defined as the level of unemployment divided by the labour force. The employment rate is defined as the number of people currently employed divided by the adult population (or by the population of working age). In these statistics, self-employed people are counted as employed.[5]
The skills required in a labour force can vary from individual to individual, as well as from firm to firm. Some firms have specific skills they are interested in, limiting the labour force to certain criteria. A firm requiring specific skills will help determine the size of the market.[6]
Variables like employment level, unemployment level, labour force, and unfilled vacancies are called stock variables because they measure a quantity at a point in time. They can be contrasted with flow variables which measure a quantity over a duration of time. Changes in the labour force are due to flow variables such as natural population growth, net immigration, new entrants, and retirements.
Changes in unemployment depend on inflows (non-employed people starting to look for jobs and employed people who lose their jobs that are looking for new ones) and outflows (people who find new employment and people who stop looking for employment). When looking at the overall macroeconomy, several types of unemployment have been identified, which can be separated into two categories of natural and unnatural unemployment.
References
- Borjas, George J. (14 January 2015). Labor economics (Seventh ed.). New York, NY. ISBN 978-0-07-802188-6. OCLC 889577338.
- Tarling R. (1987) Labour Markets. In: Palgrave Macmillan (eds) The New Palgrave Dictionary of Economics. Palgrave Macmillan, London.
- Graham, Mark; Anwar, Mohammad Amir (2019-04-01). “The global gig economy: Towards a planetary labour market?”. First Monday. doi:10.5210/fm.v24i4.9913. ISSN 1396-0466.
- Kenton, Will. “Labor Market”. Investopedia. Retrieved 2020-10-30.
- Mankiw, N. Gregory (2016-12-05). Principles of economics (Eighth ed.). Boston, MA, USA. ISBN 978-1-305-58512-6. OCLC 974706695.
- Tarling, R. (1987). “Labour Markets”. The New Palgrave Dictionary of Economics. pp. 1–4. doi:10.1057/978-1-349-95121-5_1213-1. ISBN 978-1-349-95121-5.
- Gustav Ranis (February 1997). “The Micro-Economics of Surplus Labor” (PDF). Yale University.
- Frank, Robert H.; Microeconomics and Behavior. McGraw-Hill/Irwin, 6th Edition: 2006
- Hacker, R. Scott (2000). “The Impact of International Capital Mobility on the Volatility of Labour Income”. Annals of Regional Science. 34 (2): 157–172. doi:10.1007/s001689900005. S2CID 154020468.
- Tarling, R. (1987). “Labour Markets”. The New Palgrave Dictionary of Economics. pp. 1–4. doi:10.1057/978-1-349-95121-5_1213-1. ISBN 978-1-349-95121-5.
- Froeb, Luke M. (2016). Managerial economics : a problem solving approach. McCann, Brian T.,, Shor, Mikhael,, Ward, Michael R. (Michael Robert), 1961- (Fourth ed.). Boston, MA. ISBN 978-1-305-25933-1. OCLC 900237955.
- Borjas, George J. (14 January 2015). Labor economics (Seventh ed.). New York, NY. ISBN 978-0-07-802188-6. OCLC 889577338.
- 2010 Prize in Economic Sciences in Honor of Alfred Nobel Press Release
- • Edward P. Lazear and Paul Oyer, 2004. “Internal and External Labor Markets: A Personnel Economics Approach,” Labour Economics, 11(5), pp. 527 and 528. [Pp. 527–554.]
• JEL Classification Codes Guide: M per JEL:M5].[unreliable source?]
Paul, Oyer; Scott, Schaefer (2011). Personnel Economics: Hiring and Incentives. Handbook of Labor Economics. 4. pp. 1769–1823. doi:10.1016/S0169-7218(11)02418-X. ISBN 9780444534521.