The once-thriving job market in the U.S. is showing signs of cooling, particularly in the area of salaries for new employees.

After adjusting for inflation, the average pay for newly hired workers dropped by 1.5% in the 12 months leading up to July, decreasing from $23.85 to $23.51 an hour. This marks the most significant decline in a decade, according to a study by the W.E. Upjohn Institute for Employment Research based on Labor Department data.

In contrast, the inflation-adjusted earnings for workers who remain in their jobs saw a 2.3% increase during the same timeframe, as noted in the Upjohn Institute report.

During periods of economic growth, newly hired employees often receive larger pay increases compared to existing ones, as companies scramble to fill positions and compete for a smaller talent pool, explains Brad Hershbein, a senior economist at the Upjohn Institute. As job vacancies rise, workers frequently change jobs, putting additional pressure on companies to offer higher wages.

However, according to Hershbein, “When the economy slows,” which is currently happening, “the situation reverses.” While businesses continue to provide noteworthy raises to keep their current staff, there’s much less urgency to increase pay to attract new talent.

Current Job Market Status

The data highlights that the labor market is weakening more significantly than the official monthly jobs reports indicate and has been doing so for a longer time than previously assumed, according to Hershbein.

In August, U.S. businesses added 142,000 positions, averaging just 116,000 added monthly from June to August. This is notably lower than the average of 211,000 jobs added in the prior three months. Despite this, the unemployment rate fell back to a low 4.2%, after a slight increase to 4.3% the previous month.

The concerning trends regarding wages for new hires may prompt the Federal Reserve to consider reducing its key interest rate by half a percentage point at its upcoming meeting, as inflation shows signs of easing and the job market cools, according to Julia Pollak, chief economist at ZipRecruiter, a major employment website.

Pollak also noted that recent hires are often on the “bleeding edge” of the workforce and more sensitive to economic shifts compared to those who remain in their positions.

A survey by ZipRecruiter from the second quarter indicates job seekers may be losing leverage. Only 58% of U.S. workers saw pay increases when changing jobs, a decrease from 70% previously. Only 30% of recent hires reported being actively recruited, down from 46% earlier this year. Moreover, the percentage of new hires negotiating their salaries drastically dropped to 26% compared to 43% earlier.

Potential Federal Reserve Rate Cut in September

After the Fed raised its benchmark rate to a 23-year high of 5.25% to 5.5% to combat inflation in 2022 and 2023, Pollak believes that Fed officials will likely opt for a smaller quarter-point rate cut.

“They might be falling behind the curve,” she explained.

Impact of the ‘Great Resignation’

In the early stages of the COVID-19 pandemic, salaries for new hires soared. Between July 2020 and July 2022, during a period of significant labor shortages and increased job changes, wages for new hires increased by a total of 7% after adjusting for inflation, surpassing pay raises for those already employed, according to Upjohn Institute data.

The downtrend in pay for new hires began over a year ago, with their annual earnings rising by just 0.5% in the year ending July 2023, factoring in inflation. Annual pay increases averaged 2.5% in the first half of 2022 but slowed to just 1.3% in the latter half, according to the Upjohn Institute report.

Despite widely reported employment figures showing a booming job market in 2022, with over 6 million new hires per month exceeding pre-pandemic numbers, the wage data for new hires suggests the labor market has been slowing for a longer duration than typically acknowledged.

This means it may take longer for the Federal Reserve to stimulate the economy and labor market through interest rate reductions in the coming weeks and months.

“It’s like stopping a freight train,” Hershbein remarked, referring to the difficulty of reversing economic direction. “Are we approaching a recession? Not yet, but the signs are getting closer.”