July 12, 2017
While business cycles vary in their length and growth rates, there are some consistent patterns. Most obviously, the labor market tightens as the business cycle advances with unemployment falling and the percentage employed rising. This tightening of the labor market increases the bargaining power of workers since they are more likely to have a choice of jobs than they did during the downturn or during the early phase of the recovery. As a result, workers are likely to move to more desirable and better-paying jobs. Better paying jobs are also likely to be more productive jobs, which mean that the shift in employment patterns as a result of a tightening labor market could provide some boost to productivity growth. (This is offset in part by the fact that large numbers of people shifting jobs will reduce productivity.)
This pattern is likely to be especially strong among less-educated workers since they are the ones most likely to lose their jobs in the downturn. An employer is far more likely to lay off a retail clerk or assembly line worker than a store manager or a shift supervisor. This means that the improved labor market situation during the upturn is likely to disproportionately benefit workers at the bottom end of the wage distribution.
While this pattern is likely showing up throughout the economy, the pattern in restaurant employment over the course of the business cycle can provide a good proxy for the situation of less-educated workers more generally. Restaurants are the lowest paying major sector of the economy. They also provide many jobs for people with few skills and/or little education. As a result, the employment and pay trends for restaurant workers are likely to reflect the trends throughout the economy for less educated workers. For this reason, restaurant employment trends may provide us a with quick real-time picture of the state of the labor market for less-educated workers.
The simplest and most obvious way in which restaurant employment follows the business cycle is the rate of job growth. In each of the last four cycles, restaurant employment rose rapidly as a share of total employment in the first half of the recovery. The rate of growth in the restaurant share of total employment fell off sharply in the second half of the business cycle as the labor market tightened, as shown in Table 1 below.
Table 1 – Change in Restaurant Share of Payroll Employment
| Change in restaurant share of total payrolls (percentage points) |
|
| 1982-1985 | 0.59 |
| 1986-1990 | 0.13 |
| 1991-1995 | 0.35 |
| 1996-2000 | -0.08 |
| 2001-2004 | 0.52 |
| 2005-2007 | 0.21 |
| 2008-2013 | 0.55 |
| 2014-2017 | 0.33 |
Source: U.S. Bureau of Labor Statistics
In the second half of the 1990s cycle, the restaurant share of employment actually fell. This can be seen by workers leaving lower paying, lower productivity jobs as better jobs open up. While the restaurant sector itself is important, accounting for roughly 8 percent of total employment, it can also be seen as a proxy for the low-wage labor market more generally. If workers are fleeing restaurant jobs for better paying opportunities in other industries, it is likely that they are also being pulled away from the lower paying jobs in higher paying industries.
The wage pattern in restaurants relative to other sectors gives us more insight into this issue. Here we find wage growth in the restaurant sector trailing wage growth in the private sector as a whole in the first part of the recovery when the labor market was relatively weak. This is in keeping with the idea that less-skilled workers have little bargaining power in a weak economy. However, this reverses in the second half of the recovery when the labor market tightens. This pattern is shown in Table 2.
Table 2 – Hourly wage growth first and second half of recovery
| Annual wage growth: restaurants (annual percent change) |
Annual wage growth: total private (annual percent change) |
Annual wage growth difference (percentage points) |
|
| 1982-1985 | 2.37 | 4.12 | -1.75 |
| 1986-1990 | 4.47 | 3.15 | 1.32 |
| 1991-1995 | 2.38 | 2.69 | -0.31 |
| 1996-2000 | 4.41 | 3.77 | 0.65 |
| 2001-2004 | 2.26 | 2.86 | -0.61 |
| 2005-2007 | 4.13 | 3.54 | 0.59 |
| 2008-2013 | 2.76 | 2.52 | 0.24 |
| 2014-2017 | 3.70 | 2.31 | 1.39 |
Source: U.S. Bureau of Labor Statistics
There was a large gap between the economy-wide average growth in the hourly wage and the growth in restaurants in the first half of the cycle. This was sharply reduced and in fact reversed in the last three cycles, with wage growth in the restaurant industry sharply outpacing wage growth in the rest of the economy. This issue is complicated to some extent by minimum wage laws, the passage of which is likely to boost the growth in wages in restaurants.
The impact of a tighter labor market on the restaurant industry can also be seen in trends in quit rates. The restaurant industry is always a high turnover industry with much higher quit rates than for the economy as a whole. Figure 1 below shows the patterns since 2000, the first year for which there is data.
As can be seen, the gap between the quit rates for restaurant employees and the overall private sector fell sharply with the 2001 recession and again in the Great Recession. It has expanded again with the recovery, but the gap is still below its pre-recession level and the peaks hit in 2000.
Lessons from Restaurants
There are a few points that are suggested by this limited set of data. First, if restaurant employment is a good proxy for the low wage sector of the labor market, we can see the recent slowdown in the rate of growth in restaurant employment as indicating a tightening of the labor market with people not being forced into the lowest paying jobs. Still, the fact that the share of employment is still rising indicates that we are far from seeing the strong labor market we saw in the late 1990s.
The strong recent growth in wages in the restaurant sector relative to the rest of the economy points in the other direction since the gap is far larger than in the recovery from either of the last two recessions. However, the recent wage growth data are complicated by the fact that a number of states and cities have raised their minimum wages in the last few years, which would disproportionately affect workers in restaurants.
The fact that the gap between the quit rate for the restaurant industry and the overall quit rate is still far below the peaks of the prior two cycles also suggests that the labor market is not overly tight. Again, other factors, like the rise in the minimum wage, can complicate the comparison, but it is likely there is still some room to go in tightening the labor market.
More generally, we can read these data as suggesting that there are still many workers employed at low-paying, low-productivity jobs, who would be able to get higher-paying, higher-productivity jobs if there were more demand in the economy. This has the virtuous effect that the shift would itself increase productivity, which allows for higher pay without creating inflationary pressures. This is a very small sample and there, of course, many other factors that complicate simple comparisons, but it can be seen as providing evidence that if the current cycle is like the last few cycles, there is some room for the labor market to tighten further.
