By Zack Fritz, Sage Policy Group
Supply constraints were a—and perhaps the—defining dynamic of the post-pandemic economy. Shutdown orders frustrated supply chains and reduced shipping capacity, while a barrage of early retirements devastated the labor supply. The latter was exacerbated by the increased share of would-be workers who temporarily decided to stay home as caretakers and the temporary reduction in immigration.
This, along with trillions of dollars in pandemic relief funding, caused an acute and sudden labor shortage. The number of open, unfilled jobs swelled from 7 million at the end of 2019 to more than 12 million by March 2022—by far the highest level on record. In short, there were too many jobs and not enough workers.
This caused a generational shift of power from employers to employees. Pay increases ballooned for employees who moved jobs, with the median income increases for job-switchers peaking at a 16% year-over-year pace in the middle of June 2022. Incredibly, that meteoric increase in pay understates the shift in power to workers; employers had to offer significant lifestyle concessions, like remote work, in order to fill open positions. Workers, eager to cash in, quit their jobs at an unprecedented pace from 2021-2023, while employers were historically reluctant to lay workers off.
Rather than suddenly popping, this ballooning imbalance between the supply of and demand for workers slowly deflated in 2023 and 2024. Chalk this up to three broad factors. First, there was an extraordinary swell in immigration, both legal and otherwise. Second, the Federal Reserve began raising interest rates, cooling certain segments of the economy. And third, consumers and state and local governments burned through a large portion of their pandemic relief funding.
Job openings fell, albeit gradually, and as of this writing are only marginally above pre-pandemic levels. Workers, either satisfied with their new positions or unable to find new ones, are now quitting their jobs at the slowest pace since the aftermath of the Great Recession.
While employers are still relatively reluctant to part with the workers they have, there are signs that they’ve regained a significant share of power. Return to office mandates have rippled out from major, news-grabbing employers like JPMorgan and Amazon. The rate at which earnings are increasing, while still above 2019-levels, has fallen from a nearly 6% year-over-year pace in 2022 to a 4% year-over-year pace by the end of 2024.
The new presidential administration may, indirectly, push some power back in the direction of employees. Many of the proposed policies are stimulative, like tax cuts and deregulation, and that will boost the demand for labor. At the same time, stricter immigration policy will limit the supply of workers. More than 19% of the labor force is currently foreign born, up from about 17% at the start of the pandemic. This dynamic will be especially apparent in certain segments like construction.
The upshot is that, while the economy is anticipated to grow at a healthy pace throughout 2025, the return of supply constraints could potentially put upward pressure on wages. If that pressure is enough to meaningfully alter the path of inflation, the Federal Reserve will be unable to lower rates. As of this writing, the consensus forecast has two 25-basis point rate reductions in 2025, two fewer than were forecasted as of the third quarter.
