Wage growth accelerated in Q2, says ADP

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Wages grew at an average rate of 4.0 percent over the past year, according to payroll giant ADP, increasing the average wage level by $1.09 to $28.54 an hour in the second quarter of the year.

The ADP Research Institute’s Workforce Vitality Report found that growth accelerated from 3.8 percent to 4.0 percent annual as of June 2019, thanks to strong wage gains for workers in the manufacturing sector (4.4 percent wage growth, $29.83 hourly wage) and construction industry (4.4 percent wage growth, $28.65 hourly wage).

“The quarter ending in June we’re seeing annual wage growth accelerate to 4 percent, compared to 3.8 percent last quarter at the end of March,” said Ahu Yildirmaz, co-head of the ADP Research Institute, during a conference call with reporters Wednesday. “In 2018, average annual wage growth was around 2.8 percent per month. So far this year, we are running around 3.8 percent, and today’s number for June, which is 4 percent, reflects a tightening labor market and rising labor shortage.”

For the service sector, professional and business services (such as accounting and tax preparation) saw 4.1 percent wage growth to an average $36.45 hourly wage, while the information sector experienced 4.2 percent wage growth and an average $41.56 hourly wage, and trade saw 4.3 percent wage growth to an average $25.27 hourly wage.

The report looked at different sectors of the labor market, including those who switched jobs, held onto their current jobs and entered the job market. “We continue to see that overall wage growth is being held back mainly by compositional changes in the labor market,” said Yildirmaz. “In this report, we provide different segments of the workforce: job holders, job switchers and entrants. As you look at those segments, they are each experiencing wage growth of 5 percent or better. Even 4 percent average wage growth indicates that the overall wage measure is being supplemented due to a large number of high-wage older workers leaving the workforce and being replaced by lower-paid younger workers, so the accelerated 4 percent average is actually not reflecting all the different segments within the labor market. When you look at the holders, switchers and even entrants we are seeing higher wage growth. Data from job holders shows that the tight labor market is in fact forcing companies to pay more and that businesses are holding onto their skilled workers by increasing their wages. We see that this quarter, as of June, wages increased by 5 percent for job holders. This is an accelerated rate as well compared to the prior quarter. We also reported wage growth for job switchers and those who change jobs from one company to another, job hoppers. In June, they enjoyed an average increase of 5.3 percent when they accepted a new job.”

Job switchers in the information industry led the way with a wage level of $41.08 and growth of 9.7 percent. Job switchers in professional and business services and construction also experienced high wage growth of 8.3 and 8.7 percent, respectively. In trade, job holders experienced stronger growth in wages than the workers who switched to the industry, 5.2 percent versus 3.8 percent, but lagged in employment growth with only a mere 0.6 percent annually.

ADP is also seeing some trends in wage growth among different genders and generations. “An interesting dynamic has emerged between male and female wage growth,” said Yildirmaz. “Female job holders are encountering larger wage gains than their male counterparts. So far in 2019, female holders — those who hold their jobs more than a year — they have average wage gains of 5 percent, while men average around 4.6 percent. … But even more surprising is that overall wage growth among females in the labor market has broken out to 4.7 percent in June, not only for holders but for everybody. The point is, from a wage growth perspective, regardless of the segment they are in, women are doing better, whether they are holders or switchers. Unfortunately this is not indicative of a shrinking gender pay gap. We’re not saying that the pay gap is shrinking. More likely this change is due to the changing composition of the labor force. Men account for a larger share of the baby boomer workers, and they are nearing retirement age. They are at the top end of the pay scale, so as more male workers retire, they are being replaced by younger males at lower pay. Then from a wage growth perspective, we are seeing a depressed wage growth for males.”

ADP also found differences among various age groups. “In the report we can also break down the wages by age group,” said Yildirmaz. “The sweet spot for workers is the workers under the age of 34. They can still command a higher increase in wages, but can also get larger raises without switching. They are doing well, no matter whether they are holders or switchers. The 25- to 34-year age group job switchers enjoy an average of 9.4 percent increase in wages when they change jobs, but they can also get a nearly 8 percent increase when switching. It’s pretty healthy wage growth for them. Workers in that group are moving up in the ranks and they are being rewarded by these raises. Of course, this dynamic slows for midlife workers and those older than 55.”

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