Inflation May Spell Trouble for Industries with Sluggish Wage Growth

September 16, 2021
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Author: Mallory Vachon, PhD

On a year-over-year basis, the price for the basket of goods included in the Consumer Price index (CPI) calculation increased 5.3% compared to August 2020, down from 5.4% in July. Coming in slightly lower than expectations, the CPI rose 0.3% in August, as compared to 0.5% in July. This slower growth in prices indicates that inflation is less of a long-term concern, but rather caused by supply chain issues and changes in demand for certain goods after a year of shutdowns and halting business operations.

cpi-visual-August-2021

The monthly and year-over-year increases are driven by a relatively small, but important, set of goods – gasoline, household furnishings and operations, food, and shelter. These categories contain essential items that most consumers need for everyday life, making it difficult to reduce consumption to account for the increases in price, especially if incomes don’t rise accordingly.

Overall wage growth – 4.4% from August 2020 to August 2021 – did not keep pace with inflation. Employees in certain industries may be particularly vulnerable if inflation persists, finding that their wages don’t have the same purchasing power. Several key industries, including Manufacturing, Construction and Retail, saw wages rise more slowly than inflation from August 2020 to August 2021.


In addition, businesses in those industries may continue to struggle with hiring new employees if workers seek higher wages and wage growth elsewhere. With the already tight labor market and businesses struggling to find and retain talent, these additional pressures could make hiring more difficult.

Manufacturing is among the industries with the slowest wage growth at 3.3%. Slow wage growth combined with a low unemployment rate of 3.6% will make it even more difficult to fill these positions going forward. Workers may choose other industries, such as Retail, that have higher wage growth and less strenuous working conditions.

The Retail industry is responding to current trends and labor market conditions by increasing pay and offering other benefits, like college tuition and health insurance, in the hopes attracting workers as we head into the holiday season. However, with an unemployment rate at 6.5%, the Retail industry has more potential workers looking to reenter the labor market, so employers need these incentives to hire workers and ensure they don’t switch to other industries. The pandemic created unique challenges for Retail, but it also compounded long-term trends, including the shift to online shopping, making matters even more complex for employers. ThinkWhy’s LaborIQ industry recovery timeline indicates that Retail will not recover all jobs lost to the pandemic until 2025 or later.

In the current economic climate, all industries, especially those with lower wage growth and labor shortages, need to get creative to attract workers. The Construction industry faced labor shortages before the pandemic, and those challenges have only worsened. For Construction and similar industries, training programs and apprenticeships, combined with searching beyond the traditional labor mix, will be key for the industry in the long term. Despite these challenges, the industry should recover all pandemic job losses by 2022 due to strong demand for housing in most major markets in the U.S.

Why it Matters

With the already tight labor market and businesses struggling to find and retain talent, the additional pressures of inflation combined with lower wage growth could make hiring more difficult. Industries like Manufacturing, Construction, and Retail will need to maintain competitive wages or risk losing employees to industries with higher wages and more wage growth.

“LaborIQ

LaborIQ by ThinkWhy reports, forecasts and advises on employment conditions and the impact to jobs, industries and businesses across all U.S. cities.