Wage Growth, Labor Market Tightness, and Inflation: A Service Sector Analysis

Abstract

This Economic Commentary explores the connections among labor market tightness, wage inflation, and price inflation at the service sector level. Across most service sectors, sector-specific labor market tightness and nominal wage growth have been above prepandemic averages since 2022. The data suggest that a stronger positive relationship between labor market tightness and wage growth has emerged in the aftermath of the pandemic. The relationship between sector-specific wage growth and inflation is more varied. In the education and health services sector, higher wage growth is associated with higher inflation after about one year; in the leisure and hospitality services sector, the positive relationship is contemporaneous. I do not find a significant relationship between wage growth and inflation in the other service sectors, such as transportation or financial and business services.