Working Paper

Drivers of Wage and Employment Growth in Recent Years: A Supply and Demand Decomposition

Abstract: Understanding whether labor market developments stem from supply or demand forces has fundamental implications for the conduct of monetary policy. This article develops a structural vector autoregression (VAR) methodology to decompose U.S. employment and wage growth into supply and demand components using sign restrictions. Extending Shapiro (2026), we separately identify trend growth, current shocks, and past shocks across different industries. Results reveal that goods-producing sectors experienced strong demand-driven growth in 2022, which subsequently weakened as Federal Reserve tightening took effect. Service sectors showed robust demandthrough2023, butby2025, supply-sidefactors—likely due to immigration policy changes—became dominant. We validate our shock identification by linking estimated demand shocks to financial dependence measures during monetary tightening and supply shocks to immigration flows. These findings highlight the asymmetric nature of post-pandemic labor market rebalancing and underscore the importance of distinguishing supply from demand forces for appropriate monetary policy calibration.

https://doi.org/10.20955/wp.2026.004

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2026-03-27

Number: 2026-004