Wage Growth Subdued in Most Sectors in 2014

Spend Matters welcomes another guest post from John Bauman of IHS.

Average private-sector wages will grow 2.2 percent in 2014 as the US labor market moves closer to balance, with the unemployment rate falling below 6.5 percent by the end of 2014. A tightening market for professional workers and a swifter pace of job creation are at the heart of the outlook for 2014; however, many sectors of the economy are still struggling to find their footing, which will keep improvements in wage growth modest.

Many of the headwinds that held back labor markets in 2013 (payroll tax-cut expiry, government shutdown, sequestration) are behind us. Stronger economic growth relative to 2013 will support a faster pace of job creation and lower the unemployment rate, but the recovery remains lopsided, and some industries will fare better than others in 2014. We expect the pace of job creation to accelerate over the year, with the economy adding a total of 2.2 million jobs this year, enough to keep chipping away at the unemployment rate.

gradual recovery for wage growth

Labor markets for professional workers are beginning to show signs of tightening. The unemployment rate among professional and related occupations is 3.2 percent, the lowest of any occupational group in the country, but it is still above the sector’s pre-recession trend. A rebound in consumer spending on services will fuel job creation in the professional and business services sector, with wages for professional workers growing 2.2 percent.

The goods-producing sector faces some headwinds in the near term. Strong industrial production in the last half of 2013 led to an inventory buildup that will unwind over the first half of 2014, resulting in slower industrial production growth. Weaker production growth, combined with weather-related shutdowns in the first quarter, will slow manufacturing wage gains over the first half of the year. The construction sector also faced a difficult first quarter due to weather conditions; however, we expect slowdowns in construction activity in the first quarter to be fully recovered in the second quarter. Looking ahead in 2014, the goods-producing sector will be better positioned to achieve stronger wage growth. Pent-up US demand for durable goods will continue to support manufacturing activity, while a strong rebound in housing demand supports the construction sector. Wage growth in the goods-producing sector will accelerate from 1.8 percent in 2013 to 2.0 percent in 2014 and 2.3 percent in 2015.

Skilled workers continue to experience the highest rate of wage growth. Unemployment rates among skilled trade workers are rapidly declining and employers are reporting shortages of skilled and experienced trade workers. Skilled professions are beginning to exhibit stronger wage growth, helped by a significant investment outlook in the oil, gas, and chemicals sector and by heavier manufacturing dependence on highly skilled, highly productive workers. A rapidly aging workforce also contributes to the tightening labor market. More than 40 percent of skilled trade workers are over the age of 45, and many are on the cusp of retirement. Skills shortages will pose an upside risk to our outlook over the next decade.

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