Why Wages and Job Growth Show An Inverse Relationship

The decrease in the Labor Force Participation Rate (LFPR) is what eventually led to job growth slowing but wages increasing significantly. The LFRP represents the number of people who are employed or actively searching for jobs. In February 2020, the LFPR was 63.3%, while it is 62.6% as of June 2023. After the coronavirus pandemic started in March 2020, the LFRP dipped sharply for the rest of 2020 and early 2021, while gradually increasing till June 2023. That being stated, the LFRP hasn't reached pre-pandemic levels yet. As per the United States Census Bureau, demographics are the primary reason why the LFRP has decreased by 0.7% over the past three and a half years. The average population age has increased and people are aging out of the workforce.

Figure 1: Change In Labor Force Participation Rate Over The Past Decade (2013 to 2023)
                                                                                                                                                                     
 

A low LFRP decreases the unemployment rate. When there are fewer individuals in the workforce, the demand for labor increases and employers have the incentive to hire more people. The unemployment rate was 3.7% in May 2023 while it was 3.6% in June 2023. When there are fewer people available to work, employers must increase wages in order to attract and hold onto talent. Hence, Americans are seeing a slowdown in job growth but an increase in wages. The wage rate increased by 4.4% in June 2023. These statistics are represented graphically below.

 Figure 2: Change In Unemployment Rate Over The Past One Year (July 2022 to July 2023)

Figure 3: Change in Benefits Wages And Salaries Over The Past Five Years (2018 to 2023)

As per the available data, the LFRP has caused a "domino effect." The change in LFRP led to changes in other economic variables, which ultimately affected the relationship between wages and job growth. We have enough evidence to conclude that the relationship between wages and job growth depends heavily upon the LFRP. Based on Figure 1, although the LFRP hasn't reached pre-pandemic levels yet, the graph's upward trend suggests that it will eventually. When that happens, we can expect the demand for labor to decrease, thus, leading to a higher unemployment rate. Wages and job growth will still show an inverse relationship, but in this scenario, job growth will increase while wage rates will go down. 

Sources:

Cambon, Sarah Chaney. “Wage Gains, Low Unemployment Keep Pressure on Fed; Hiring Slowed in June, Job Report Shows.” Wall Street Journal, 7 July 2023.

“Employment Cost Index - March 2023 - U.S. Bureau of Labor Statistics.” Employment Cost Index, Mar. 2023, www.bls.gov/news.release/pdf/eci.pdf.

“United States Unemployment Rate June 2023 Data - 1948-2022 Historical.” United States Unemployment Rate - June 2023 Data - 1948-2022 Historical, June 2023, tradingeconomics.com/united-states/unemployment-rate.