Key Themes and Takeaways
• Average weekly earnings rose sharply during the pandemic-related recession, mostly because employment losses are concentrated in low-wage sectors and low-wage jobs within sectors
• Weekly earnings growth is driven much more by average hourly earnings than average weekly hours, but declines in such hours in Construction and Manufacturing slowed weekly wage growth
• Year-over-year earnings growth was almost identical to that in the prior year after adjusting for worker mix, even at the height of the pandemic
• Average weekly earnings growth is expected to slow through the remainder of 2020 and into 2021

Introduction

Payroll, a key driver of workers compensation premium, is determined by employment and wages. While job losses earn most headlines, there are interesting patterns in changes to wages as well. Average weekly earnings increased dramatically during April 2020 and year-over-year wage growth has remained high since. Why did this occur? And will these wage changes have a major impact on premium or indemnity payments net of employment effects?

Wage changes are primarily due to the changing composition of the workforce. Pandemic-related job losses have been concentrated in relatively low-wage jobs and sectors, and these jobs have been slowest to come back. This is what many observers have dubbed a “K-shaped recession,” where negative pandemic-related effects have quickly rebounded for some workers but not others, with higher-paid workers in professional sectors tending to recover more quickly than lower-paid workers in service sectors.

These different trajectories by worker type affect overall average wages and hours, but hourly wage growth, after adjusting for worker mix changes, has been largely consistent with past years. In other words, although wage changes have been very large, they can be thought of as an offshoot of employment change and should not have an unusual inflationary impact on indemnity payments conditional on any particular work injury.

One key exception is that in some sectors, most notably Construction and Manufacturing, decreased average weekly hours during the pandemic have also played a significant role in changing average weekly wages. These declines put downward pressure on wages and potential indemnity payments for workers in these industries. The hours drop in Manufacturing was particularly steep in the second quarter but has mostly recovered in the third quarter.

How Have Average Weekly Earnings Changed?

Average weekly earnings for US workers jumped 5%—from $978 to$1,027—between March and April of 2020. Rather than actual wage increases for workers, this was primarily a mix effect, since the dramatic number of pandemic-related layoffs in March and April were concentrated in relatively low-paying jobs like restaurant workers and retail sales associates. As shown in Table 1, average weekly earnings in Leisure and Hospitality are less than half the national average and average weekly earnings in Retail Trade are over one-third below average.

These sectors were both hard hit by lockdowns this spring, and Leisure and Hospitality has been especially slow to return. Our companion piece in this Quarterly Economics Briefing, “As US Employment Recovers From COVID-19, Services and States Are Key,” estimates that 40% of the gap between current employment and pre-pandemic expectations is in the Leisure and Hospitality sector.

Average weekly wages in September were \$1,023, about the same as in May. This figure is seasonally adjusted and would normally increase over a four-month period. However, recovering employment has put downward pressure on wage growth, as the returning employment is in the same lower-paying jobs whose absence led to the large average weekly wage growth in the first place. However, employment has not yet fully recovered, and thus year-over-year wage growth is still very high.

• Average weekly earnings across the third quarter of 2020 were 5.4% higher than in the third quarter of 2019.

• In the second quarter of 2020, year-over-year wage growth was 6.8%.

• Both figures are much higher than 2019 year-over-year growth, which was 2.9% for both the second and third quarters.

Breaking down wage growth by sector clearly shows that overall wage growth reflects significant composition change.

• Year-over-year wage growth was 5.4%, but as shown in Table 1, sector wage growth ranged from 7.5% in Retail Trade to 1.6% in Construction and Leisure and Hospitality. Usually, average weekly earnings grow similarly across sectors.

• Comparing the third quarter of 2018 and 2019, most sectors’ average weekly wage growth were close to overall wage growth, with only Manufacturing, Transportation and Warehousing, and Information being more than one percentage point different.

• Between the third quarter of 2019 and 2020, only the Retail Trade and Other Services sectors had average weekly wage growth above the total private average, while average weekly wage growth in Transportation and Warehousing, Manufacturing, Wholesale Trade, Leisure and Hospitality, and Construction were all less than half of overall wage growth.

The latter bullet demonstrates how much the changing composition of jobs affected wage growth both within and across sectors. Wage growth between the third quarter of 2019 and 2020 exceeded that of 2018 and 2019 in most sectors, but especially in Retail Trade and Other Services, as shown in Table 1.

We previously observed that these two sectors have low average weekly earnings, but even within the sector, relatively low-paying jobs were lost at the highest rates during the pandemic. In Retail Trade, lower-paying floor workers were the most likely to be laid off while stores were closed. Within Other Services, lower-paying personal services such as hair and nail salons lost larger shares of employment than relatively high-paying services in repair and maintenance.

How Much Do Changing Hours Affect Average Weekly Earnings?

When average weekly earnings change, the change must come from either workers’ average weekly hours or average hourly earnings. For the wage increase since the pandemic, the explanation is primarily the latter. Shown in Table 2, hours increased by 0.8% from the third quarter of 2019 to 2020. Even this small change was partly compositional: Leisure and Hospitality workers have the fewest average weekly hours and their share of employment declined. While this is not a major explanation overall, changes in average hours worked during the pandemic have had an important effect on weekly earnings growth in some sectors.

In a few sectors, most notably Manufacturing, Construction, and Wholesale Trade, hours have decreased by more than 1% from this time last year. Hours cuts in Manufacturing were especially important at the pandemic’s onset, with average weekly hours declining by 5% year-over-year in the second quarter. These cuts have partially reversed in recent months and the year-over-year decline is only 1.2% for the third quarter. Still, in all three sectors, decreasing hours partly offset hourly earnings growth that, like most other sectors, was larger from 2019 to 2020 than 2018 to 2019.

Hours changes have mattered very little in white-collar sectors such as Professional and Business Services, Financial Activities, and Information. These sectors have many workers who are salaried and can perform normal work activities from home, leading to less disruption in schedules during the pandemic. For professional and business services, average hours have even increased from 2019.

Hours, Average Weekly Wages, and Indemnity

Changes in hours worked due to the pandemic may have had an impact on indemnity payments for injured workers. The determination of a worker’s average weekly wage for purposes of calculating their workers compensation benefits is driven by state statute and case law. For example, a state may calculate average weekly wages by taking a worker’s average earnings for a reference period, such as the 13 or 52 weeks immediately preceding the injury. The shorter the reference period, the more effect a change in hours worked during the pandemic may have, but the longer the reference period, the more claims that could include pandemic-affected hours in the calculation. Some states have provisions that may instead allow indemnity benefits to be based on the full-time weekly wage at the time of injury, particularly if other provided methods cannot be reasonably and fairly applied. Hence, the impact on workers compensation wage replacement benefits—from provisional changes in hours worked due to the pandemic—would be expected to vary across states.

Average Weekly Wage Changes and Worker Mix

What happens if we account for the changes in worker mix? The Bureau of Labor Statistics’ Employment Cost Index (ECI) is designed to measure the hourly price of labor (wage and benefit changes) independent of shifts in employment across industries and occupations. Unlike the national weekly earnings and hours measures we cited above, mix is held constant within and between sectors when calculating the ECI.

And indeed, the ECI shows none of the extreme fluctuations seen in the raw national data. Unfortunately, third quarter ECI data is not available. But second quarter data, in which any pandemic effects should be clearest, show none of the unusual patterns documented in the overall earnings data. This is reported in Table 3.

Year-over-year wages and salaries increased 2.9% in the ECI, almost exactly the same as the 3.0% increase during the prior year. Wage increases in every sector were within one percentage point of the overall change, with the sole exception of Transportation and Warehousing (4.4%). The disruption of the pandemic, strikingly obvious in the unadjusted numbers, is practically invisible in the ECI.

This finding suggests that virtually all the changes in hourly wage growth previously discussed, both within and across sectors, is due to the changing mix of employment, rather than wage changes within a job. Employment has declined, especially in Leisure and Hospitality, Retail Trade, Professional and Business Services, and Education and Health Services—what we refer to in our QEB companion report as the Big Four service sectors—but when employment is not interrupted, individual workers’ wage paths have not changed much.

Wage Growth During the Recovery: Looking Ahead

Since employment losses have been so dramatic and variable by sector, we may not be surprised that unadjusted wage growth is significantly different from ECI. The ECI should be subject to smaller swings because of its focus on similar job mix over time, but the lack of any movement in the ECI from pre-pandemic wage growth still may be unexpected. Wage growth slowed during the Great Recession and pandemic-related job losses in early 2020 were larger and faster than those in 2008 and 2009. In that case, why wasn’t there at least some lower wage growth in the ECI from this time last year?

One major reason is the suddenness and magnitude of job losses caused by the pandemic and ensuing lockdowns. In a typical recession, wage growth gradually declines. Workers do not necessarily receive automatic pay cuts, but over time, they have less bargaining power to negotiate raises and fewer opportunities to move to higher-paying jobs. In early 2020, many establishments simply shut down right away, whether temporarily or permanently. Layoffs, furloughs, and cutbacks to hours have been a much more impactful part of the pandemic recession response than pay cuts for the continuously employed.

More people have been returning to work over the last few months and are expected to continue to do so throughout 2020 and into 2021. Wages have flattened or declined in most sectors in recent months, as some of the lower-wage jobs lost this spring have returned. A June research study showed pay cuts and wage freezes during the onset of the pandemic were most common among a relatively small group of high-wage workers.“The US Labor Market During the Beginning of the Pandemic Recession,” Cajner et. al., June 2020, https://bfi.uchicago.edu/wp-content/uploads/HurstBFI_WP_202058_Revision.pdf. Since these were applied mostly to a small subset of people, and wage adjustments were not implemented across all companies at one time, the effects were small in aggregate data. But as total employment and consumer demand have still not yet completely rebounded, it is likely we will see more evidence of slower wage growth across sectors through 2020 and into 2021, both in baseline and mix-adjusted data.

Summary

What has driven average wage increases during the recession? Our most notable finding is that the unusually large and disparate average weekly wage changes across sectors are a direct result of the massive changes in worker mix caused by employment losses.

Wage paths proceeded as usual for most high-wage workers, while a higher share of lower-paid workers lost their jobs entirely: the “K-shaped” recession. However, as some of the latter group has returned to work in the last few months, the composition of the workforce has inched toward normality and wage growth has stopped. But there is still a long way to go before the workforce resembles its pre-pandemic mix.

While wage growth has been high, there are sectors where wages have grown more slowly. In these sectors, hours changes are an important part of the explanation. Manufacturing average weekly hours declined by 5% at the onset of the recession and remain below pre-pandemic levels. Construction hours also fell. Cuts in hours affect payroll and may also impact average weekly wage calculations for injured workers, although this will depend on state statutes, case law, and in some cases, whether standard calculations can be applied to the recent extraordinary environment.

Although wage changes to date have been driven primarily by mix, we expect wage growth will slow through the rest of 2020 and into 2021. We will continue to monitor both overall wage growth and mix-adjusted indicators to assess impact on workers compensation payroll and premium.