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I’m excited to introduce the first edition in a series from Square on trends in labor and the economy. My name is Ara Kharazian, and I’m the research and data lead at Square. I’m also the principal researcher and developer of Square Payroll Index. You can read more about the full methodology here. In this series, I’ll describe and discuss recent themes in the economy using Square data. Let’s jump into our October research update.
The numbers
According to the Square Payroll Index, using payroll data from restaurants and retailers on Square’s platform nationwide:
- Average hourly earnings rose to $17.07. ($17.44 in restaurants, $16.31 in retail) in as of the end of September 2023. Base wages grew to $14.06 ($13.64 in restaurants, $15.80 in retail).
- Average hourly earnings grew 5.2% YoY (5.4% in restaurants, 4.4% in retail) as of the end of September 2023.
- Base wages grew 4.6% YoY (4.8% in restaurants, 4.2% in retail) as of the end of September 2023.
My take: The post-pandemic job market boom is over.
According to Square Payroll data, growth in average hourly earnings has fallen below the 2019 average (5.2% versus 6.5% in 2019). While base wages continue to grow at a higher rate (4.6% versus 4.0% in 2019), that growth has cooled in recent months and continues to slow. Still, Square data points to a strong job market for workers in these sectors. Though pay growth has slowed from its early 2022 peak, service workers have likely benefited from an even larger decrease in inflation, which was reported at 3.7% in August 2023. This September marks the twelfth consecutive month in which Square Payroll data showed growth in average hourly earnings outpacing inflation.
Base wages don’t tell the whole story.
Average hourly earnings are an important metric for measuring pay growth. Square calculates average hourly earnings as the sum of regular wages, overtime wages, double-time wages, and tips divided by the sum of hours an employee worked in a given pay period. For a large segment of workers, like food service workers, tips and overtime are a major component of total compensation. Simply looking at base wage growth would be an incomplete assessment of the health of the labor market for this segment of workers.
As it turns out, Square Payroll data shows that growth in average hourly earnings has outpaced base wage growth by several percentage points every month since 2018 at least, when our analysis begins. This matters for a few reasons:
First, waiters and food service workers are among the most common occupations in many U.S. states and metropolitan areas, and these occupations tend to be relatively low-earning. Given the size and composition of this group, pay growth for these workers is an important indicator for the health of the labor market and the broader economy. As Square Payroll data shows, these workers also earn a large portion of their compensation from tips and overtime, not just base wages. If a labor market analyst is only using growth in base wages to assess the health of the labor market, they are missing a large and important segment of pay growth.
Second, given that Square Payroll data shows that these two measurements of pay growth have diverged, I think it’s possible for some employers to have lost track of what competitive pay rates are nowadays. My take is that competitive pay includes a strong base wage in addition to competitive pay on the basis of average hourly earnings, that is, after accounting for tips and overtime. Worker pay is important, because low pay can be a reason for job-switching and employee turnover. Employers can use Square Payroll Index to keep track of competitive pay in their area, on a base wage and average hourly earnings basis.
Third, Square Payroll data shows that a large share of worker pay for some workers is coming from highly variable sources, like tips and overtime. While the last several years have shown high levels of growth, it’s harder to predict trends for these variable contributors, and it will become harder if these trends hold. That said, I think this concern may begin to subside. Growth in average hourly earnings and wage growth have started to converge over the last year.
Continued moderation in pay growth
Square Payroll data shows that pay growth has cooled from its peak in early 2022. Although our results show a steady decline in growth, I still think workers are operating in a pretty strong job market. The most recent report from the Bureau of Labor Statistics shows that unemployment remains at a historic low, hovering around 3.4% and 3.7% for the last two years. I’m keeping an eye on the prime age (25–54) labor force participation rate, which has shown steady growth this year as more workers enter the job market. It currently sits near a 21-year high. As more workers enter the labor force, I’m expecting continued moderation in pay growth.
The Fed sees a rebalancing labor market.
In August, Federal Reserve Chair Jerome Powell similarly noted that wage growth has slowed, but that an even larger decrease in inflation has left American workers better off. Chairman Powell called this slowdown in wage growth a “rebalancing of the labor market” and said wage growth must ultimately slow to match the Fed’s 2% inflation target. While he said he expects the labor market rebalancing to continue, I think it’s unlikely that wage growth for service workers will fall to 2%. In his remarks, Powell was referring to wage growth for the average American worker, but service workers, like those in food service and retail, tend to earn less than the average American worker, and that segment of workers typically sees year-over-year wage growth that beats the 2% inflation target by a couple percent, as shown in Square Payroll data. So, even as wage growth for the service segment slows, we would have to see a fairly significant rebalancing before growth for this specific segment of workers falls far enough to match the inflation target.
For more insights, check out Square Payroll Index here.
