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

Dvorkin, Maximiliano; Marks, Cassandra

doi:10.20955/r.2026.04

Journal Article

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 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.

JEL Classification: J20; J30;

https://doi.org/10.20955/r.2026.04