Wage growth is doing something odd in 2025 — the last time it happened was around the Great Recession

The U.S. labor market is exhibiting an unusual trend, with wage growth for "job stayers" now surpassing that for "job switchers" for the past six months, a reversal historically seen only during periods of significant economic weakness like the Great Recession. This shift, evidenced by July's 4.1% annual wage growth for stayers versus 4% for switchers according to the Atlanta Fed, signals reduced worker bargaining power, a "frozen" labor market with declining job openings, and a low quits rate, indicating a broader cooling trend from recent highs.

Analysis

The U.S. labor market is exhibiting a significant cooling trend, marked by an unusual reversal in wage growth dynamics. For the past six months, annual wage growth for "job stayers" has outpaced that of "job switchers," a phenomenon historically associated with periods of pronounced economic weakness like the Great Recession and the dot-com bust. Specifically, Atlanta Fed data for July shows a 4.1% annual wage growth for stayers versus 4.0% for switchers. This shift is symptomatic of a broader loss of worker bargaining power amid high interest rates and economic uncertainty. Supporting data includes a sharp decline in the quits rate to around 2%, a consistent low not seen since 2016, and an increase in long-term unemployment, which now constitutes 25% of all jobless individuals. Economists interpret these signals as a "frozen" labor market where employers face less pressure to offer premium wages to new hires and unemployed individuals are more likely to accept lower-paying roles. While some aggregate data still suggests the labor market remains in "pretty strong" shape, these specific wage and turnover metrics provide a clear leading indicator of underlying weakness and a departure from the torrid hiring environment of 2021-2022.

Key Decisions for Investors

• The wage growth reversal is a historical recessionary signal, prompting a review of portfolio exposure to cyclical industries and consideration of a more defensive allocation.
• Weakening worker bargaining power and a cooling labor market could translate to softer consumer spending, creating potential headwinds for consumer discretionary stocks relative to staples.
• Investors should closely monitor upcoming labor reports, as continued signs of a weakening job market could influence the Federal Reserve to adopt a more dovish monetary policy stance, affecting fixed-income and rate-sensitive equities.
• Given the conflicting signal that the overall labor market remains 'strong,' it is prudent to view this wage trend as a key indicator to watch rather than a definitive signal for aggressive repositioning.