The Surprising Upside to the Big Quit
Employers Get More Generous as Workers Get More Picky About Where and When They’ll Work
Of the many changes in America’s labor markets since the pandemic began, perhaps the most surprising has been a decisive shift in the balance of power from employers to workers. Facing historic labor shortages and much choosier workers, employers are boosting wages, improving workplace conditions, and providing more flexible work arrangements to attract the personnel they need.
In the first part of a two-part article, I explained what’s causing the labor shortage and why it’s unlikely to ease anytime soon. In this article, I show how workers are leveraging the labor shortage and other trends to be much more selective about where and when to work and under what conditions. It all adds up to newfound clout for labor and greater hiring costs and challenges for employers.
American workers are fed up with low pay and poor working conditions. OK, many have been discontented for a long while, but recently the balance of power in the workplace has swung to their side, and now they’re increasingly voting with their feet. Workers are quitting jobs in record numbers, but few are dropping out of the labor force. The overwhelming majority are either going right into new jobs or are looking for new positions. We know this because the labor force participation rate — that’s economist jargon for the share of working-age people either employed or actively looking for work — is going up (if modestly) even as the job quit rate is soaring.
In response, employers are raising wages, improving workplace conditions, and providing more flexible work arrangements as they compete to attract and retain the personnel they need to run their businesses. Pay is rising faster now than at any point in the last two decades. Private sector wages and salaries rose at a 5% annual pace in the final quarter of 2021 — twice the average rate from 2002–19 and more than a third higher than its prior peak (Fig. 1).
The gains are even richer for workers willing to move to a new job. “Job switchers” normally see greater wage gains than “job stayers” — after all, that’s the biggest reason workers change jobs. But with qualified workers now so scarce, the premium for job switchers is even greater.
What About Inflation?
The killjoys among us will be quick to point out that inflation is wiping out these pay gains. As anyone who has ventured to a grocery store or gas station in recent months appreciates, prices of just about everything are increasing quickly — in fact, at their fastest pace in four decades — and more than wages in the past two quarters. This means real wages are falling. That’s an unfortunate reversal from recent years as wages generally had been going up faster than inflation (the green bars in Fig. 2). For the eight years from 2013 through early 2021, real wages (that is, nominal wages net of inflation) grew by almost 12%.
Still, there’s good news here for workers. Wage gains tend to be “stickier” than the prices of many goods and services. Once wages and salaries increase to a given level, they tend not to go back down. But the prices of many products like gasoline and eggs are more volatile, rising one month and falling the next. In other words, the wage gains will outlast much of the inflation.
Moreover, real wages are unlikely to fall for very long. Most economists believe inflation will ease this year as the supply chain bottlenecks and other imbalances are resolved. On the other hand, the forces pushing up nominal wages — namely the worker shortages that I discussed in my prior article — should endure longer.
Changing Wage Growth Patterns
But there’s even better news for workers, especially if you care about pay equity in the workplace: Compensation is growing faster for lower-paying occupations and industries for the first time in a very long time. For example, here’s the ECI growth patterns for services (which have among the lowest compensation levels of any major occupational group) versus professionals (which have among the highest.) At the beginning of this century, (nominal) wages in most occupations were rising more or less in tandem (Fig. 3). That started to change around 2016, as service wages began to increase faster while professional salaries rose slower, at least on a percentage basis.
The impact of this shift is dramatic. Wages of professionals (orange bars in Fig. 4) rose only slightly faster than those of service occupations (blue bars) from 2006–16. But since then, wage gains have been significantly greater in services than in professions. During the pandemic, service wages have grown twice as much as professional wages.
Why the shift? One reason: Rising minimum wages. Fully half of all states nationally raised minimum wages for some or all employers last year, nine by at least a $1.00 per hour. At least nine states will be increasing again this year.
But basic supply and demand is also at play. Workers are leaving service occupations in favor of higher-paying and otherwise more desirable professions, even as growing consumer demand for services boosts employer demand for service employees. Since 2016, jobs in professional occupations have gained 9%, while service jobs have declined by 3%.
The drain from service occupations only intensified during the pandemic. Many frontline workers concluded that dealing with surly customers and risking Covid infection were not worth the low pay. Clearly, low wages are not the only factors that workers leave jobs. Workplace conditions and job satisfaction matter too and are often wanting in low-paid occupations, contributing to higher turnover in these jobs.
We Quit
Though quit rates plunged in the early days of the pandemic as workers generally wanted to hold on to their jobs, workers have been increasingly restless since the jobs recovery began in the summer of 2020, pushing the quit rates to record levels, particularly in service occupations (Fig. 5).
The overall quit rate in the private sector is about 27% higher now than before the pandemic, but turnover is up by much more in frontline occupations like health care, retail, and hospitality (which includes hotels and restaurants). By contrast, quit rates are below average for professional and business services (like lawyers and accountants) and are essentially unchanged for financial activities (like bankers and brokers). Many workers in these higher-paying sectors have been able to work from home during the pandemic and avoid the risks and difficulties faced every day by frontline workers.
The connection between wage levels and quit rates is clear. Higher-wage sectors tend to have lower quit rates than lower-wage sectors and visa-versa. The retail and hospitality sectors both have low wages and exceptionally high quit rates, while information services and financial activities have high wages and low quit rates, to cite some extreme examples (Fig. 6).
And we see a similar pattern when it comes to hiring. The lower-paying sectors enduring elevated quit rates are also generally seeing greater increases in job openings, magnifying the worker shortages at a time of historically low unemployment (Fig. 7). That helps explain all the “help wanted” signs in restaurants and stores in your neighborhood. Workers are leaving low-paying jobs with lousy benefits in search of better jobs.
How are employers reacting? By bumping up compensation in historically lower-paid occupations and positions. With higher rates of job quits and job openings — and hence worker shortages — wages are actually increasing faster in lower-paid sectors (like retail and restaurants) than in higher-paid sectors (like information services and construction) (Fig. 8).
More Income for More People
What does this mean for workers? Higher pay for just about everyone but especially for lower-income workers. Workers in the bottom wage quartile (lowest 25% of wages) saw wages rise much slower than average after the last recession through around 2014 (green line in Fig. 9). Their fortunes started to improve when service wages began climbing in 2016 and then really improved during the pandemic, both absolutely and relative to other income groups. Over the last year, pay for the lowest wage quartile grew almost twice as much (5.4%) as those in the highest quartile (2.9%).
To be sure, wages in lower-skilled occupations are still far lower than in more highly skilled professions, and these gains will hardly be enough to rectify the gross income disparities in our economy. (For one thing, the higher percentage gains are from a lower starting wage, so the differences in dollar gains between the top and bottom quartiles are closer.) Nor do they address the even wider wealth disparities that generate most of the income for affluent households through capital gains. Still, these trends are certainly a welcome if surprising step forward for workers coming out of the pandemic.
More equitable incomes also ultimately bode well for most households and the economy as a whole. Though rising wages may take a bite out of corporate profits, our economy generally grows faster when we spread the wealth and put more money into the pockets of more people (though how we do it makes difference). Conversely, economic growth has slowed in recent decades as wealth and income became increasingly concentrated among the most affluent households, who tend to spend less of their income and save more. Better to put more in the hands of those who need it more and will spend it. For all of us.
What Next?
These trends won’t go on forever. Employers desperate for workers will keep raising their wages for now to meet robust consumer demand. But over time, firms will adapt to labor shortages as higher wage levels make capital investments in automation more feasible. A dire need for truck drivers is sure to accelerate driverless trucks. Drone deliveries are coming soon.
But there are limits. Many of the services with the most significant workers shortages — in health care and hospitality — are those least amenable to automation, at least with current technology. Yes, we’re seeing robots that can flip burgers and cook pizza, but it’s hard to imagine robots taking over many occupations that take a personal touch. In any case, these adaptations take time.
In the meantime, workers are embracing the wisdom of Johnny Paycheck and quitting their jobs for something better. As workers flex their newfound power in the workplace, employers must sweeten the offering to attract them. Expect outsized wage growth to continue for a while. But pay raises alone will not be enough to attract workers to some short-staffed sectors. Surveys should show that workers increasingly prioritize flexible work arrangements and better working conditions. Retail workers are demanding greater certainty about their schedules and more hours per week so they can qualify for benefits. Firms will have little choice but to provide more of what workers demand — on top of higher pay.
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