Pandemic Wage Pressures – Liberty Street Economics


The recovery since the start of the pandemic has been characterized by a tight labor market and rising nominal wage growth. In this article, we look at labor market conditions from a more granular sectoral perspective, focusing on data covering the nine major industries. This distribution is motivated by the exceptional nature of the pandemic episode, the way it has asymmetrically affected sectors of the economy and the possibility of exploiting sectoral heterogeneities to understand the drivers of recent labor market dynamics. work. We document that wage pressures are greatest in industries with the largest jobs deficit relative to their pre-pandemic trend, but that other factors explain most of the wage growth differentials. We suggest that a key factor is the extent of physical contact which had to be compensated by offering higher wages. One of the implications of our analysis is that, as COVID-related factors recede, sectoral imbalances could be restored to the supply side as employment recovers towards the pre-pandemic trend.

Are sectoral labor markets tight? Descriptive evidence

We focus our analysis on the distribution by NAICS industry of the following sectors: construction, manufacturing (goods-producing industries), trade, transport and public services, information, financial activities, professional and commercial services, education and health services, leisure and hospitality, and other services (service industries). We then collect data on the real and nominal Employment Compensation Index (ECI) from the Bureau of Labor Statistics (BLS) on a quarterly basis, the number of job openings data from the survey of job openings and job turnover (JOLTS) and number of unemployed and employment data from the BLS Current Population Survey (CPS) at monthly frequency for the sectors mentioned above from December 2000 until at the most recent observation (June 2022).

We first document labor market tightness using the number of unemployed by job opening rate as a measure of labor market conditions (see e.g. Domash and Summers (2022)). By this measure, all sectors now have ratios that signal tighter market conditions compared to the pre-COVID period, with the exception of construction. In addition, service-providing industries experienced higher wage growth than goods-producing industries. For example, in the second quarter of 2022, annual wage inflation in leisure and hospitality was 66% higher than in manufacturing.

Wage inflation and tightness in the labor market

We explore the link between nominal wage growth and labor market indicators using simple regression analysis. We regress nominal ECI year-over-year wage growth on the unemployed by opening measure of labor shortage at the sector level and on the four-quarter moving average of inflation lagged by year-over-year CPI to check the relationship between sectoral wage inflation and past annual CPI inflation. A negative coefficient on labor tightness implies that fewer unemployed per job vacancy, i.e. more tightness in the labor market, 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 sector-level COVID dummy that applies from the start of the pandemic (from the first quarter of 2020) to isolate specific pandemic factors that affect sector labor markets. As mentioned above, an example of these factors is the extent to which a sector is exposed to physical contact.

Wage regressions using unemployed by job opening, COVID dummy

Unemployed per opening -0.50*** -0.33*** -0.69*** -0.47*** -0.33** -0.08*** -0.42** -0.07*** -0.09
(0.09) (0.05) (0.11) (0.08) (0.11) (0.02) (0.15) (0.01) (0.06)
CPI inflation lagged 0.34** 0.22*** 0.46*** 0.32*** 0.45*** 0.26*** -0.13 0.39*** 0.10
(0.12) (0.06) (0.06) (0.09) (0.08) (0.05) (0.13) (0.07) (0.07)
COVID dummy 3.13*** 1.54∗∗∗ 0.40* 0.97** 0.69* 0.72*** 0.64 0.33 0.98***
(0.40) (0.21) (0.20) (0.30) (0.26) (0.16) (0.44) (0.24) (0.24)
Constant 2.85*** 2.78*** 2.36*** 3.06*** 1.90*** 2.20*** 3.66*** 2.25*** 2.25***
(0.39) (0.20) (0.21) (0.32) (0.26) (0.13) (0.42) (0.19) (0.23)
Comments 82 82 82 82 82 87 87 87 82
Adjusted R^2 0.612 0.655 0.638 0.494 0.458 0.555 0.088 0.576 0.231
Standard errors in parentheses, ∗p Notes: cns is construction, edu is education and health services, fin is financial activities, Inf is information, lsr is leisure and hospitality, mfg is manufacturing, prf is professional services and commercial, srv is services and trd is commerce, transportation, and utilities.

Note that in the table above, we list the sectors with the highest to lowest wage growth. The strength of the COVID dummy variable (measured by a higher coefficient associated with it in our regression) is related to industries with the highest pandemic wage pressures. The highest value for the COVID dummy variable is for the leisure and hospitality sector, followed by trade, transport and utilities, then the information sector. The first two are in fact the sectors in which nominal wage increases have been the strongest.

What determines the heterogeneity of the COVID dummy variable between sectors? Here we suggest that one possible factor is the intensity of physical contact at work. Indeed, the estimated coefficient of the dummy variable COVID resulting from the regression could be related to the average index of physical proximity of the sectors used by Famiglietti, Leibovici and Santacreu (2020) indicating that wage increases are more concentrated in contact-intensive sectors.

Sectors with higher wage inflation during the pandemic have higher physical proximity

Scatter plot and rising trend line;  physical proximity index on the y-axis 50-65, and estimated COVID dummy coefficient on the x-axis, 0-3.5.
Sources: O*NET Physical Proximity Index and authors’ calculations.
Notes: inf stands for information, lsr for leisure and hospitality, mfg for manufacturing, srv for services, and trd for commerce, transportation, and utilities.

In the graph above, by restricting our analysis to industries where the COVID dummy variable is significant at the 1% level, we find that industries with higher physical contact in the workplace saw higher wage increases. high during the pandemic by controlling the sectoral labor shortage.

A history of labor supply

Although labor market indicators point to a tight labor market, employment across sectors is still below the pre-pandemic trend. Interestingly, the leisure and hospitality sector is experiencing the highest wage pressures as well as the largest gap in employment levels in thousands from the pre-pandemic trend.

We further explore the heterogeneity of sectoral wages by documenting the percentage of sectoral employment that has recovered from the pre-pandemic trend in June 2022. Values ​​below 100 imply that employment has not not yet reached the pre-pandemic trend level and those above 100 imply that employment has recovered beyond the pre-pandemic trend level. A value of 100 means actual employment is the same as the implied pre-pandemic trend. Indeed, only employment in the information sector has recovered above the pre-pandemic trend. We relate this measure to sectoral wage inflation in the scatter plot below.

Sectors with the highest wage inflation also have the largest gap in employment recovery

Scatterplot and Downtrend Line;  resumption of use axis of ordinates 85 to 110;  salary inflation 0 to 10.
Source: Bureau of Labor Statistics.
Notes: cns is construction, edu is education and health services, fin is financial activities, Inf is information, lsr is leisure and hospitality, mfg is manufacturing, prf is professional services and commercial, srv is services and trd is commerce, transportation, and utilities.

While sectoral labor markets appear extremely tight, there is a significant employment gap in sectors where wage pressures are greatest. One possible interpretation of sectoral gaps in employment is that workers are unwilling to re-enter the labor market, especially in specific sectors where employees work in close contact with others and are more exposed to COVID.


We examine the state of labor market conditions from a sectoral perspective. While labor market indicators point to tight sectoral labor markets, the level of employment in almost all sectors is still below the pre-pandemic trend. The sector-level heterogeneity in terms of wage growth, labor market tightness and employment level suggests that the recent nominal wage acceleration is associated with pandemic-specific factors. Our analysis suggests that labor market rebalancing could be restored on the supply side as employment returns to pre-pandemic levels rather than on the demand side by reducing vacancies.

Photo: portrait of Gianluca Benigno

Gianluca Benigno is responsible for international studies in the research and statistics group of the Federal Reserve Bank of New York.

Serra Pelin is a former senior research analyst in the Research and Statistics Group at the Federal Reserve Bank of New York.

How to cite this article:
Gianluca Benigno and Serra Pelin, “Pandemic Wage Pressures,” Federal Reserve Bank of New York Economy of Liberty StreetAugust 4, 2022,

The opinions expressed in this article are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.


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