As the labor market improves, workers typically feel empowered to quit their jobs for better-paying opportunities. While quits are on the rise today, better pay is hard to find.

The May labor market report was somewhat weak, but not weak enough, we think, to change the mood at the Fed. After all, the labor market is still tightening, albeit at a slower pace. A key problem, though, concerns wages. Although we see continuing evidence of faster job creation in lower-wage sectors, this trend is not producing much in the way of aggregate wage increases.

The grass is always greener

Looking more closely at Job Openings and Labor Turnover Survey (JOLTS) data, we find a disparate story behind the national quit rate, a measure of non-retiring voluntary quits. The quit rate is important because it can be a leading indicator for wage gains: As more workers quit, businesses may realize they need to raise pay to retain their workforce. Now, that relationship appears to be in question.

As the quit rate has risen among leisure workers — food services and hotel management staff, for example — wages in this sector have also risen at a decent pace. In this, we see the normal relationship between quits and wages. But when we look at the quit rate in professional services, wages in the higher-paying sectors of the economy do not appear to be moving much.

The aging explanation

In large part, this difference in wage pressures may have to do with aging. Older, well-paid workers are being replaced, in many cases, by younger, less well-paid workers. The younger workers are happy to have jobs and to move from their parents’ basements, but, at the macro level, their willingness to accept lower salaries reduces observed wage growth.

One might think that wage pressures will begin to rise soon; the examples of former crises and recoveries certainly suggest a positive correlation between quits and wages. So far, though, we do not see that in the data. Of course, given the backdrop of the corporate profit squeeze, we think it is likely that the labor market will weaken in the coming months. Corporations will be doing what they can to rebuild their profit levels, and there is the risk that the private sector will react aggressively to the continued margin squeeze. If, as a result, the Fed decides it needs to tighten monetary policy more substantially, that could open up a scenario under which recession risks would rise quite sharply.

Next: The new consensus trade

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In the United States, the economic cycle may be coming to its natural end. What happens next may be a deepening of global risk.