U.S to face more wage pressure

The US could continue to struggle to entice workers back. 

Most developed countries are experiencing difficulties in their labour markets as a result of Covid-19. In general, unemployment rates are elevated, as are the number of vacancies - and the number quitting the labour market. Needless to say, these trends are exacerbating supply shortages and so lifting both wages and prices. But, while this is a problem for many, it is the biggest problem in the US.

Why might it be a bigger problem in the US and hence a potential source of greater wage and price pressure? There are likely to be many explanations but we think two are key. The first is Covid and the second is income inequality. On the first of these, Mr. Steve Barrow, Head of Standard Bank G10 Strategy has highlighted before that vaccine hesitancy is greater in the US than many other developed countries and he has also detailed how this breaks down by political persuasion with far more Republicans showing tendencies to refuse Covid vaccines than Democrats. The upshot of this is that states where Republicans tend to dominate, perhaps in a legislative sense or by population, are tending to see the lowest vaccination rates.

Why is this important? it is important because it is producing pockets of the economy where low vaccine uptake seems to be promoting hesitancy among workers when it comes to returning to existing jobs or taking new jobs. In short, states with relatively high vaccine take-up such as Connecticut (77.3%) tend to have relatively high participation rates (62.9%), whereas a state with low vaccine take-up, such as Ohio (54.9%) has a lower participation rate (60.8%). Of course, there are exceptions to this but, across the country as a whole there’s a positive association across the two. What’s more, because there is quite a wide range of vaccine take-up across the states, with some states still under 50% for even just one dose, it means that large parts of the US are far short of their peers overseas.

If we compare the US with Canada, for instance, we not only see that Canada’s vaccination rate is higher but its take-up across the provinces is far more even than that we see in the US. Other countries outside of North America also tend to show lower regional variation than the US. Returning to Canada, it is not surprising, therefore that high vaccine uptake means people are more confident about going back to work. Participation rates in Canada have returned to pre-Covid levels while those in the US remain a good way below pre-pandemic levels.

All this tends to suggest that the US could continue to struggle to entice workers back. It might also mean that the wages offered to potential workers has to rise more to attract people back, with positive knock-on effects for those already in work. The second notable issue to do with high vacancy rates and high quits rates is that most of those walking away from jobs and not returning (at least to the same type of job on the same wage) is in the relatively low-paid food services and accommodation industries.

In the past year the number quitting jobs and not returning immediately rose by around one million to just over four million which is a record. A full quarter of these were from the accommodation and food services industries, which are relatively low paid, client facing jobs that are now less attractive because many probably believe that the Covid-related risks are not worth taking given the low pay on offer.

“All of these factors point to more wage pressure. Of course, much of this is good. The Fed wants higher wages and more equal pay, but good things can turn bad if the increases become excessive. We can’t say whether that will happen but the point we’d make is that, if they do happen anywhere in the developed world, they are more likely to happen in the US than elsewhere”, Mr. Steve Barrow said.