We recently released Q2 2020 of PayScale Index, which tracks quarterly and annual trends in compensation growth. Q2 was a beastly quarter for the U.S. economy. It was just announced by the Bureau of Economic Analysis that the U.S. GDP fell 32.9 percent in Q2. As many businesses have shut down in the wake of Covid-19 and 30 million Americans are collecting unemployment benefits, it might be assumed that wage growth also fell.
However, wages have not fallen. Because of nominal wage rigidity — an economic term that refers to how wages don’t deflate in a down economy — those who are still employed are continuing to see wage stability, if not wage increases.
According to Q2 Index from PayScale, nominal wages grew 0.8 percent since Q1 and 2.5 percent since last year. For comparison, the Q2 PayScale Index from 2019 showed a 0.3 percent wage growth in Q2 of 2019 and a 2.0 percent wage growth year over year. In other words, wages are rising and are rising more in the troubled year of 2020 than they did in 2019 when the talent market was much tighter.
What explains this?
Essentially, it boils down to how organizations manage compensation in a recession. Research from economists shows that the majority of organizations conduct layoffs as an alternative to reducing pay. Typically, businesses take a long-term view of economic growth and retraction and rationalize that it is better to reduce the workforce and choose who to let go then to reduce pay for all employees and lose their top talent. On average, recessions last between one and two years, which organizations can better weather with a lean but motivated workforce than a large and disgruntled one.
The recession resulting from Covid-19 has been a little atypical as far as recessions go. Initially, it was unclear how long social distancing would be necessary and some organizations have taken the unprecedented measure of issuing pay cuts rather than resorting to layoffs in the hope that the situation would be temporary and that it would be less costly to hang on to employees at low levels of business for a few months than rehire new employees at a later date.
Other organizations have had the opposite experience, with business surging and the organization being unable to keep up with demand. Some businesses are on a hiring spree. Some are also issuing pay increases, temporarily or permanently, in order to hang on to talent and get through the present crisis. Top performers always have options and unproductive turnover is still taking place, even in a down economy.
In addition to national wage growth, PayScale Index also looks at wage growth by industry, occupation (or job category), and metro area ( major city) and ranks them in order of most to least wage growth.
Wage Growth Ranking by Industry
The Arts, Entertainment, & Recreation industry defends the number one spot in Q2 of 2020. Nominal wages grew by 1.2 percent Q/Q and 3.3 percent Y/Y. Technology takes the number two spot, with 1.1 percent nominal wage growth Q/Q and 3.1 percent Y/Y. Industries that saw more wage growth may be benefiting from social distancing protocols. Alternatively, lay-offs among lower-paid workers in this sector may have skewed wages to higher averages.
The energy & utilities industry remained at the bottom of our list. Nominal wages grew 0.8 percent Q/Q and grew 1.9 percent Y/Y. Accommodation & food services landed in second to last with 0.3 percent Q/Q growth and 2.0 percent growth. Manufacturing also continues to struggle, with 0.7 percent Q/Q growth, and 2.2 percent growth Y/Y.
Wage Growth Ranking by Occupation (Job Category)
Defending the top spot since last quarter, nominal wages for transportation jobs grew 4.5 percent Y/Y and 1.3 percent Q/Q. Information technology jobs took second place with 1.1 percent Q/Q nominal wage growth and 3.0 percent Y/Y nominal wage growth. Retail jobs saw 2.8 percent growth Y/Y and 0.8 percent growth Q/Q in nominal wages, which may be the result of increased wages for frontline workers or the effect of some shops opening back in some areas.
Human resources jobs, in the middle of the pack last quarter, are now at the bottom of our list for nominal wage growth. Nominal wages for HR jobs grew 0.6 percent Q/Q and 2.0 percent Y/Y. Food service & restaurant jobs also dropped significantly through the ranks with a Q/Q wage growth rate of 0.4 percent and Y/Y wage growth rate of 2.1 percent. Hiring freezes, furloughs, and layoffs may have disproportionately impacted workers in these professions.
Wage Growth Ranking by Metro (Major City)
In the number one spot for Q2, Seattle grew by 1.2 percent Q/Q and 3.6 percent Y/Y. San Jose, San Deigo, and Los Angeles come just behind Seattle with nominal wage growth of 1.2 percent Q/Q while San Francisco came in fifth with nominal wage growth of 0.9 percent Q/Q and 3.2 percent Y/Y.
Houston saw the weakest Y/Y growth at 1.1 percent and Q/Q growth of 0.4 percent, which can be attributed to the dropping price of oil and the Saudi-Russia price war. Minneapolis saw only slightly higher Y/Y growth than Houston, at 1.4 percent, and quarterly growth at 0.3 percent. Minneapolis’ economy may have been negatively impacted by rioting
Real Wages vs. Nominal Wages
PayScale Index also looks at real wages compared to nominal wages. Nominal wages are how much pay has increased as a straight dollar amount. Real wages factor in the buying power of the dollar and adjust the amount wages have grown against rising inflation. When looking at real wage growth, Americans are able to afford less every year for the past ten years. In Q2 of 2020, nominal wages show a total growth of 16 percent since 2006 but real wages have dropped 9 percent.
After the recession of 2007-2009, nominal wages flatlined for many U.S. workers while inflation continued to increase as the economy recovered. The effectively shortchanged workers who were hired at deflated rates during or just after the recession. Many organizations began to default to annual increases of 2 or 3 percent in subsequent years, which not only wasn’t as high as people were making before the recession, but also failed to keep up with inflation.
Of course, some occupations and industries recovered faster than others. Wages in professional industries such as technology, engineering and finance saw wage growth increase sooner and steeper than professionals in other occupations and industries. For example, wage growth for technology began to climb again in 2010 whereas for healthcare and retail didn’t start to see a return to wage growth until 2013.
The potential for something similar to happen this time around with Covid-19 is important to watch. While some organizations will take advantage of the situation to pay employees less according to market trends, others will seize on the opportunity to differentiate when it comes to compensation and pay fair and competitive wages as soon as the economy recovers.
Interested in seeing how wage growth compares across industries, occupations, and cities? Learn more at PayScale Index.
Wage Fall in the Immediate Aftermath of Covid-19
PayScale Index looks at controlled wage growth nationally as well as across industry, occupation, company size, and major metro area. The purpose of PayScale Index is to analyze how wages have grown for specific jobs quarter over quarter and year over year. This is what we call controlled wage data.
However, PayScale has also conducted analysis on wage growth generally where compensable factors are not controlled. Analyzing uncontrolled wage data can reveal how the economy is impacting wages holistically, which is particularly interesting when viewed by industry and occupation month over month and year over year during the Covid-19 outbreak.
Our analysis reveals that in the month of March, wages took a dive for specific industries, notably nearly nine percent in retail and seven percent in accommodation and food services. However, wages continued to rise overall, albeit more slowly than when compared to last year. Wages have also stagnated or fallen in association with new job offers during this time period.
Because the economy has been changing so quickly, we analyzed wage growth both month over month and year over year in a downloadable report. We also created an online experience where you can view weekly changes to wage growth as well as changes in employee sentiment.
For full analysis on uncontrolled wage growth in response to Covid-19, download the report.
Interested in learning more about PayScale salary data and how our compensation software can help you pay employees fairly and competitively in these times of change? Contact us for a demo.
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