Increasing Demand for Talent Spurs Steady Wage Growth

August 4, 2017 – The U.S. labor market posted steady growth in wages in the second quarter, according to the newly released ADP Workforce Vitality Report. Overall, wage growth increased by 2.3 percent year over year across all industries in the second quarter of 2017 and is higher than the 1.8 percent growth in wages reported by the U.S. Bureau of Labor Statistics.

The ADP report tracks a set of workers to determine wage growth among those who are consistently employed. This set of workers falls into two categories: job holders and job switchers. Job holders are those who stay in the same job, and job switchers are those who change jobs.

Job holders’ wages grew by 4.4 percent and job switchers’ wages grew slightly less by 3.4 percent year over year in the second quarter. On average, job holders’ hourly wage levels were $10 more than that of job switchers. Tracking full-time workers alone, job switchers increased their wages by an average of 4.9 percent when compared to job holders, who saw their wages rise by 4.4 percent.

“In the second quarter, job holders experienced a slight acceleration in wage growth on a yearly basis across most industries,” said Ahu Yildirmaz, co-head of the ADP Research Institute. “This could be a result of increased efforts by employers to retain their employees as the labor market continues to tighten and skilled talent becomes scarce.”

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Where Job Growth Occurred

Considering wages across industries, the service sector proved to be more attractive for job switchers than the goods sector. Across most service industries, job switchers’ wage growth exceeded that of job holders. The information industry led the way in wage growth in the second quarter where job holders wages increased by 5.2 percent. Meanwhile, full-time workers who switched jobs to the leisure and hospitality industry gained the most with a 6.7 percent increase in wages.

Workforce dynamics vary across regions. The region that remains the strongest is the West, which despite exposure to commodities and the high dollar, benefits from strong demographics, booming tech, tourism and international trade, and a recovering housing market. The workforce vitality index for the West has advanced by 5.2 percent over the past year. The West also leads other regions in terms of wage growth of holders, and growth has edged higher over the past year. Employment growth remains solid at 2.3 percent and job switchers are benefiting from a modest bump in pay.

The Northeast is doing surprisingly well also given its exposure to the weak economy in Europe. Wage growth of 4.3 percent for job holders has been stable over the past year. The respectable pace may be due to the higher share of educated workers who are in high demand in the region’s knowledge-based industries, including education, finance, tech and professional services. The region’s weak demographics render it more difficult for employers to find suitable workers, driving higher wages of both holders and switchers. Employment growth is lagging behind the national average.

Wage growth for job holders has been stable in the Midwest, but job switchers are faring less well and employment growth has been sluggish. The region has high exposure to the struggling global economy as well as high exposure to commodities. While oil prices have begun to rebound, crop prices have not. Yet, wage growth, at 4.4 percent, slightly outpaces that in the Northeast.

Finally, the South, which has a high share of low-wage jobs and also high exposure to commodities, is experiencing slightly more modest wage gains for holders, although gains have accelerated in recent quarters. Similarly, at 2.9 percent, switchers in the South can expect a smaller raise than in other parts of the country. Employment trends remain in the lead along with the West.

In summary, the strongest wage growth can be found in the following groupings: in the West, in the leisure & hospitality and information industries, among women and younger workers, among workers with little job tenure and among those employed in large companies.

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Looking Ahead

Expectations of wage increases are higher for the third quarter than the second quarter, according to a new Business Conditions Survey released by the National Association for Business Economics. The report found 47 percent believe wages will rise over the next three months. That’s up from 44 percent who expressed that view in a similar survey released in April.

And when asked in the July survey whether they had raised wages and salaries in the second quarter, 47 percent said they did. The July survey also asked about hiring difficulty, and slightly more than one third of panelists also reported their firms did face some difficulty over the last three months. On the other hand, 27 percent reported no difficulties. The remainder either did not hire or were unable to answer for their firms. Common approaches for recruiting new employees for those firms that faced hiring problems included increase salary offers or a focus on training internal candidates.

“But employment growth remains positive,” said National Association for Business Economics’ survey chair Emily Kolinsky Morris, “and panelists do report some firming in capital spending, though not necessarily related to policy developments, as the vast majority of respondents continues to cite no change in hiring or investment decisions in the wake of post-election developments. Pricing power — or lack of it — and labor costs are generating some headwinds for a significant number of firms.”

Wages Hold Steady, Talent Rewarded

However, according to some reports, wages are expected to slow. A new forecast by the Hay Group division of Korn Ferry revealed that in the U.S., a three percent salary increase is predicted for this year. Adjusted for the 1.1 percent inflation rate, the real wage increase is 1.9 percent.

According to a survey released by Willis Towers Watson, pay raises for U.S. employees are expected to hold steady at three percent. The survey also found that employers will continue to reward their best performers with significantly larger pay raises as they look for ways to retain their top talent and strengthen existing pay-for-performance cultures.

“Given the continued low rates of inflation and the ongoing pressure on profit margins, employers remain cautious when it comes to budgeting salary increases,” said Laura Sejen, managing director, rewards, at Willis Towers Watson. “While most companies are feeling little pressure to increase budgets relative to what we’ve seen in recent years, many are starting to question how those budgets are spent and whether their conventional approaches to salary planning are delivering a good return on that three percent investment.”

According to a CareerBuilder study, which polled human resource managers, 70 percent said their companies will have to start paying workers higher wages because the market has become increasingly competitive for the skills and labor needed. The report also found that more than half of employers will raise wages for current employees, while two in five will offer higher starting salaries on job offers in the second half of the year.

Among all employers (hiring managers and HR managers), 39 percent reported they will offer higher starting salaries for new employees over the next six months; 20 percent of all employers plan to increase starting salaries on job offers by five percent or more. More than half (53 percent) of employers plan to increase compensation levels for current employees before the year’s end and, similar to salaries on new job offers, 21 percent said the compensation increase for existing staff will likely be five percent or more.

“Where we’ll likely see a more noteworthy change is in the area of wages,” said Matt Ferguson, chief executive officer of CareerBuilder. “The number of hires made each month continues to lag the number of jobs posted for key functions within organizations, and the majority of employers feel they will now have to pay workers more to attract and retain them because the talent supply is not keeping up with demand.”

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; Stephen Sawicki, Managing Editor; and Will Schatz, Managing Editor – Hunt Scanlon Media