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Higher Wages Alone Not Likely to Improve Labor Participation

March 11, 2022

By Kevin Marrs, courtesy of SBAM Approved Partner ASE

The inevitable reaction to worker shortages and an increase in labor demands has been higher wages.  As the theory goes, employers meet the challenge of these two forces by increasing wages to reach a new equilibrium.  However, the pandemic has resulted in a sort of Alice’s Adventures in Wonderland scenario where nothing is at it should be.  In fact, according to research outlined by the Federal Reserve Bank of Atlanta, wage growth alone is unlikely to return labor force participation levels to pre-pandemic levels. 

According to the paper and analysis by the Atlanta Fed, the three-month average median wage growth in the overall economy was 5.1% in January 2022, the highest seen in 20 years.  However, despite this increase, labor participation rates are not increasing at rates one might expect.  In the article, researchers from the Atlanta Federal Reserve point to generational differences as one reason for the stalled growth in participation rates.  They argue that employers may have outdated expectations of what wage increases can do to entice workers back to the office or shop floor.

Put more plainly, employers are unlikely to increase wage sufficiently to bring people who may have been on the sidelines back to the workforce.  Their research also shows that Gen Xers and millennials are much less responsive to wage changes (i.e., increases) than boomers.  Their research shows that compared to baby boomers, millennials’ labor force participation are only about three-quarters as responsive to wage changes, and Gen Xers are only about half as responsive.

This is unfortunate for many reasons, but largely because Gen Xers make up the largest share of the U.S. population.  So, if a 5.1% increase in wages is not enough to get workers back to the office, what is?  That is uncertain, but the data suggest that for some groups (i.e., Gen Xers and Millennials) its more.  Add inflation to the mix, and the problem becomes more dire for employers.

The authors of the study suggest that employers might need to “dig deeper” to entice workers back to the labor force.  For some, the formula of what will work may look a lot different than what might have worked in the past.  For sure pay is part of the equation, but employers also need to have an eye to other “wage-alternative solutions” to meet the challenge.  Some employers are already taking heed of this and are offering a myriad of benefits more in tune with a younger generation of workers.

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