Slowing Job and Wage Growth in Late 2022

The labor market was a key stabilizing force in the US economy in 2022, despite high levels of inflation. This resilience helped to offset some of the negative impacts of inflation on the economy.

The Federal Reserve has raised interest rates at the fastest pace since the early 1980s to fight inflation, but this has caused the economy to slow down. This is having an impact on hiring and wages.

The unemployment rate was 3.7% in November, according to the Labor Department. This is just above the half-century lows that were matched earlier in 2022. Fed officials have forecast that the rate will rise to 4.6% in the fourth quarter of 2023. This information was released in December in the form of economic projections.

The labor market was surprisingly resilient in 2022, with many workers finding new jobs or keeping their old ones despite the pandemic. What lies ahead in 2023? It is hard to say, but the labor market is likely to continue to be affected by the pandemic in some way.

According to the U.S. Labor Department, employers added an average of 392,000 jobs per month in 2022, which is slower than the rate in 2021 but more than double the rate in 2019.

The leisure and hospitality sector led the way in job gains, with the industry accounting for about one in five net jobs added in the first 11 months of 2022. Job gains were also strong in other service sectors.

According to Aneta Markowska, chief financial economist at Jefferies, workers at the lower end of the income distribution in areas like leisure and hospitality, transportation, and retail did particularly well in October. She noted that demand for services was "just enormous."

The pace of hiring slowed down in the second half of 2022, and several large employers announced layoffs or plans to cut jobs, including Goldman Sachs Group Inc., Meta Platforms Inc. and Amazon.com Inc.

Although those moves didn't result in an increase in broad layoff figures in late 2022, economists surveyed in the fall by The Wall Street Journal forecast employers to start shedding jobs in 2023.

In 2022, wages grew at a historically strong rate, though the gains failed to keep pace with inflation. According to the Labor Department, average hourly earnings for private-sector employers rose 5.1% in November, from a year earlier, while consumer prices rose 7.1% during the same period.

Leisure and hospitality workers saw the biggest wage growth of any industry tracked by the Federal Reserve Bank of Atlanta in the 12 months ended in November, with median wages rising by 7%. Trade and transportation and manufacturing workers also saw above-average wage growth during this period.

According to Nick Bunker, an economist at the jobs site Indeed, the fastest wage growth was seen in areas where there was strong demand for workers but relatively few workers available, and where pay was lower than average.

According to Indeed's wage tracker, lower-paying sectors have seen a slowdown in wage growth in recent months. Mr. Bunker said that this is likely due to the current economic conditions.

According to the tracker, wage growth in 82% of industries was lower in November than six months earlier. If pay changes remain on the same trajectory, wage growth will return to prepandemic levels by the second half of 2023, Mr. Bunker said.

One factor that is likely to contribute to wage growth in 2022 is the difficulty that many employers have had in finding workers.

The number of job openings exceeded the number of unemployed people throughout 2022, according to the Labor Department. However, the gap between the two began to narrow. The labor-force participation rate, which is the percentage of workers who are employed or seeking a job, has not yet recovered to its prepandemic level.

"The labor-force participation rate is likely to continue to trend down over time as the population ages," said Stephen Stanley, chief economist at Amherst Pierpont Securities. Stanley went on to say that this trend could have implications for the economy, as a smaller labor force could lead to slower economic growth.

The decline in labor supply can partially be attributed to early retirements caused by the pandemic. Mr. Stanley said that those who have retired early are unlikely to return to the workforce.

The participation rate for prime-age workers (those between the ages of 25 and 54) has been slowly approaching prepandemic levels over the past few months, but has edged down slightly in recent weeks. The participation rate for workers in their early 20s remains lower than for prime-age workers, but has also been slowly increasing.

The unemployment rate in 2022 fell to match the half-century lows set in 2019 and early 2020, just before the pandemic began. The November rate was up slightly from the 3.5% low for 2022, set in September and July. This is good news for the economy, as it shows that the job market is slowly but surely recovering from the pandemic.

Some private economists believe that the unemployment rate will increase more than what the Federal Reserve has projected.

Ms. Markowska of Jefferies said she expects the unemployment rate to reach about 5% by the end of 2023 and then continue rising in the following year. This is higher than the forecast from Nomura, which predicts a 5.9% unemployment rate in late 2023.

Ms. Markowska stated that since there is not much potential for growth in the labor force, any increase in unemployment is more likely to come from job losses. This would have a negative impact on consumption and top-line growth for many businesses, who would then need to cut costs and shed labor.