As US job market cools, starting salaries are dropping in some sectors, payroll firm says

Last year, Rishi Khanna, CEO of a Dallas-based software company, had to open his wallet to hire new employees.

He shelled out as much as $225,000 for a sales leader and more than $100,000 for a software developer as he vied for candidates who were juggling multiple offers from other companies.

Now, salaries for those same positions have dropped to about $150,000 and $85,000, respectively, and Khanna's company, called ISHIR, is flooded with applications from far more qualified candidates. As a result, he no longer needs to lure prospective workers with ever-higher pay packages. 

“That competition is gone,” Khanna says. Applicants “are looking for the right offer, the right job. They’re not (salary) shopping.”

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U.S. wage growth is easing overall, but pay increases for new hires in certain industries have tumbled from stratospheric levels a year ago as a historically hot labor market cools, according to Gusto, a payroll processor for small businesses. The pullback is mostly affecting sectors that have struggled because of the Federal Reserve’s sharp interest rate hikes the past year, such as housing, finance and technology.

But it’s also starting to spread to other industries, such as manufacturing, as more Americans who left the labor force during the depths of the pandemic stream back in because their COVID-19-related savings are dwindling and health risks are waning.

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“Businesses are needing to pay less of a premium to hire new employees,” says Luke Pardue, an economist with Gusto. “We’re seeing things return to normal. … The market is coming into balance.”

Although job seekers may not look favorably on a less torrid labor market with lower starting salaries, they’re still notching solid pay increases compared with their previous jobs.

Will inflation fall in 2023?

The softer job market is helping meet Fed Chair Jerome Powell’s goal of slowing pay increases in service industries to curtail a historic inflation spike. That could prompt the Fed to halt its aggressive rate hike campaign sooner, possibly allowing the U.S. to dodge a recession while boosting the stock market.

In March, average pay for new hires fell 9% from a year earlier in insurance, 8% in real estate, 5% in finance and 15% in information, which includes technology, according to Gusto.

A soap bubble with a dollar sign in it about to be popped by a hand holding a pin.

The tech industry hired too many workers during COVID-19’s online boom and is now paring staff. Pay in manufacturing is down about 3% as consumers who snapped up goods during the pandemic shift their spending to services, such as traveling and dining out.

Most other industries, such as restaurants, retail, hotels and construction, are still doling out higher pay for new employees compared with a year earlier, according to Gusto. And while average annual wage gains for all workers – including existing staffers and new hires – dropped from a peak of 5.9% in March 2022 to 4.2% last month, that's still a historically robust increase, according to the Labor Department.

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Tech industries, which ramped up hiring during COVID-19’s online boom, now are paring their staffs.

Workers who changed jobs are doing even better. Those making a switch in the past 12 months reaped a 14.2% bump from their year-earlier pay , according to payroll processor ADP. Wages for new hires soared last year amid dire labor shortages, and they were bound to drift lower, at least in some fields, Pardue says. A year ago, employers were desperate for workers as job openings hit a record 12 million and the number of people quitting – typically to switch jobs – hovered near an all-time high. But this February, vacancies edged below 10 million for the first time since May 2021. 

Several staffing firms – including Manpower, Robert Half and Beacon Hill – say pay for new hires generally has continued to trend higher. And Gusto serves smaller businesses that have fewer resources and tend to pay lower salaries.

But some other wage trackers are also showing declines in certain industries. From the first quarter of 2022 to the first three months of this year, advertised salaries in job postings fell by 33% for Class A truck drivers, 44,5% for landscapers, 21.3% for customer service specialists, 5% for surgical nurses and 4.5% for delivery drivers, according to ZipRecruiter, a leading job search site.

In the past year, advertised salaries in job postings fell sharply for Class A truck drivers.

Most jobs on ZipRecruiter are still recording higher pay, some by as much as 60% or more, especially in health care. But 30% of the most common job titles on the site show falling wages over the past year. That's an unusually high share, says Julia Pollak, ZipRecruiter's chief economist.

Is the labor force participation rate increasing?

A big reason for the shift is the share of adults working or looking for jobs rose to 62.6% in March, the highest in two years, though still well below the pre-pandemic level of 63.3%. More Americans who were on the sidelines are job-hunting again as the pandemic fades and the cash they saved from federal stimulus checks and hunkering down during the health crisis runs out. As a result, employers don't need to dangle such high salaries to attract job candidates.

Khanna of ISHIR says he’s drawing many applications from workers who were laid off last year by tech giants such as Amazon, Google, Twitter and Microsoft.

“They don’t want to be out of a job for too long,” he says.

Last year, he posted openings on multiple job sites and still got few responses from qualified applicants, forcing him to actively recruit workers on LinkedIn. Now, he says, he can advertise a vacancy on just one job board and attract a flood of applications from experienced candidates.

Because he’s saving money on wages, Khanna says, he has been able to hire more employees, adding about a dozen full-time staffers in the first quarter, up from three or four during the same period a year earlier.

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Are companies reducing office space?

Andy Gutman, president of Farbman Group, a commercial real estate firm in Southfield, Michigan, says starting pay for newly hired property managers, administrative assistants and construction managers is down 10% to 20% from a year ago, marking a return to pre-COVID salary levels.

Like Khanna, he cited a larger pool of qualified candidates after layoffs in commercial real estate, which is beset by a sharp downturn in office leasing as more Americans work from home.

Commercial office leasing has dropped sharply as more Americans work from home.

Gutman says his reduced labor costs allow him to pass the savings to customers through lower property management fees. Such discounts can help ease inflation.

Dominus Commercial in Fort Worth, Texas, is also paying lower wages for more qualified applicants, says CEO Stephen LaMure.

Last year, he had to hire an apartment manager to oversee an office building after receiving no interest from candidates with suitable experience and eventually let the apartment manager go.

A few months ago, when he posted the opening again, he received 10 applications from senior office building managers, each with more than 15 years of experience.

The person he ultimately hired is earning 15% less than the previous manager, he says.