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

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  • Maximiliano Dvorkin
  • Cassandra Marks

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 demand through 2023, but by 2025, supply-side factors—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.

Suggested Citation

  • Maximiliano Dvorkin & Cassandra Marks, 2026. "Drivers of Wage and Employment Growth in Recent Years: A Supply and Demand Decomposition," Working Papers 2026-004, Federal Reserve Bank of St. Louis, revised 30 Mar 2026.
    • Handle: RePEc:fip:fedlwp:102951
    DOI: 10.20955/wp.2026.004
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    References listed on IDEAS

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    1. Adam Hale Shapiro, 2026. "Decomposing Supply‐ and Demand‐Driven Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 58(2), pages 365-388, March.
    2. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    3. Brinca, Pedro & Duarte, Joao B. & Faria-e-Castro, Miguel, 2021. "Measuring labor supply and demand shocks during COVID-19," European Economic Review, Elsevier, vol. 139(C).
    4. Danilo Cascaldi-Garcia & Camilo Morales-Jimenez, 2026. "Model Perspectives on Supply and Demand Factors behind a Soft Labor Market," FEDS Notes 2026-01-30-2, Board of Governors of the Federal Reserve System (U.S.).
    5. Hee Sung Kim & Juan M. Sanchez, 2017. "Financial Conditions: Do the Ups and Downs Affect the Rest of the Economy?," The Regional Economist, Federal Reserve Bank of St. Louis, vol. 25(1).
    6. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
    7. Christopher J. Waller, 2024. "Getting Closer: A speech at the Federal Reserve Bank of Kansas City, Kansas City, Missouri., July 17, 2024," Speech 98557, Board of Governors of the Federal Reserve System (U.S.).
    8. Adam Hale Shapiro, 2022. "How Much Do Supply and Demand Drive Inflation?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2022(15), pages 1-06, June.
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    Keywords

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    JEL classification:

    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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