Economics and markets

Labor market pulse: Will recent resilience continue?

April 23, 2025

The U.S. labor market showed resilience in the first quarter of 2025, with positive hiring and wage growth. The continuation of these trends is in doubt, however, as the uncertain market environment may make firms more cautious about hiring, putting pressure on future wage growth.

Hiring in 1Q ticked up

The positive momentum in the labor market continued in the first quarter of 2025. Vanguard’s proprietary data on 401(k) enrollments indicated an increase in the hires rate, which measures new hires as a share of existing employees. The hires rate moved upward to 1.9% in March from 1.6% in December, with a notable uptick in the Professional & Business Services and Wholesale Trade categories.

“While it’s encouraging to see this resilient strength in the labor market, a lot has happened since March,” Vanguard senior economist Adam Schickling said. “We expect firms to slow their hiring in upcoming months as they navigate a highly uncertain macroeconomic environment.”

Vanguard data through March indicate an upturn in hiring

Notes: The Vanguard hires rate is calculated at the firm level and is based on new enrollments in 401(k) retirement plans administered by Vanguard divided by the number of all active 401(k) plan participants in a given month. New hires are recorded based on their hire date rather than their retirement plan enrollment date. The series is seasonally adjusted using the X-13ARIMA-SEATS method and transformed into a three-month moving average. The dataset represents a rolling two-year sample of firms with more than 250 employees across all sectors of the economy that offer retirement plans that Vanguard administers. Job Openings and Labor Turnover Survey (JOLTS) data are based on a nationally representative survey of 21,000 nonfarm business and government establishments. JOLTS is adjusted to capture firms with more than 250 employees. The two vertical bars indicate economic recessions, as identified by the National Bureau of Economic Research. JOLTS data are as of February 2025, and Vanguard data are as of March 2025.

Sources: U.S. Bureau of Labor Statistics and Vanguard.

Strong income growth propels the U.S. consumer

Hiring activity wasn’t the only bright spot for the U.S. labor market in the first quarter. We also witnessed a modest uptick in income growth. For roughly 1.5 million Vanguard record-kept 401(k) participants, we are able to infer their paycheck amounts by analyzing their 401(k) contribution amounts and contribution rates. Our aggregate measure tracks median year-over-year income growth among participants who have been with their employer for at least one year, making it roughly comparable to the Federal Reserve Bank of Atlanta’s Wage Growth Tracker for job-stayers. While the two measures closely track each other, one key distinction is that Vanguard’s measure tracks workers’ income (hourly wage multiplied by hours worked), while the Atlanta Fed’s measure tracks hourly wage growth.

Both measures showed a sharp rise beginning in mid-2020 followed by a steady decline from mid-2022 through 2024. In recent months, the Vanguard series has begun rising again, from 3.6% in January 2025 on a year-over-year basis to 3.9% in the March 2025 reading.

“While the Atlanta Fed series captures a nationally representative sample of about 2,000 workers, the benefit of the Vanguard measure is that it reflects actual rather than self-reported income for over 1 million workers,” Vanguard economist Aaron Goodman said.

Income growth in 1Q was well above inflation

Notes: The Vanguard income growth series considers employees who made 401(k) contributions in all 12 months of the preceding calendar year. For each employee contribution, we infer the paycheck amount as the contribution amount divided by the contribution rate. For each employee and each month, we compute total income divided by the number of paychecks. We then compute the year-over-year percentage change in income per paycheck (current month relative to 12 months ago) for each employee and take the median across employees. Finally, we report a three-month moving average of the monthly median growth rate. We exclude monthly observations in which the employee earns less than $200 per paycheck or in which the smallest paycheck is less than 10% of the largest paycheck. There are approximately 1.5 million 401(k) participants in the Vanguard sample in 2025. We compare the Vanguard income growth measure with wage growth for the job-stayer subsample of the Atlanta Fed Wage Growth Tracker. The Atlanta Fed defines job-stayers as those who have not changed occupation or industry in the last year and have not changed employers or job duties within the last three months. The inflation data are the year-over-year change in the Consumer Price Index for All Urban Consumers (CPIAUCSL).

Sources: Vanguard, Federal Reserve Bank of Atlanta, and U.S. Bureau of Labor Statistics.

Stronger growth among lower-income workers

We compared income growth for employees across different annual income levels. The pandemic-era increase was strongest among those earning less than $50,000 per year, peaking at 9% year-over-year growth in late 2021. This group has also experienced a sharper decline in income growth since 2022, with growth rates converging across our three income groups. In the latest (March 2025) reading, the year-over-year growth rate was 4.4% for employees with annual income below $50,000, 4.1% for those with annual income of $50,000 to $100,000, and 3.7% for those with annual income above $100,000.

“The decline in labor income growth since 2022 has coincided with a similar decline in inflation, resulting in most workers seeing their inflation-adjusted earnings grow by a healthy 1%–1.5% over the past year,” Schickling said. “Given our expectations that inflation will rise faster than wages in 2025, U.S. consumers are likely to face a tougher landscape ahead.”

Income growth among those earning below $50,000 per year has faded from peak

Notes: The Vanguard income growth series considers employees who made 401(k) contributions in all 12 months of the preceding calendar year. For each employee contribution, we infer the paycheck amount as the contribution amount divided by the contribution rate. For each employee and each month, we compute total income divided by the number of paychecks. We then compute the year-over-year percentage change in income per paycheck (current month relative to 12 months ago) for each employee and take the median across employees. Finally, we report a three-month moving average of the monthly median growth rate. We exclude monthly observations in which the employee earns less than $200 per paycheck or in which the smallest paycheck is less than 10% of the largest paycheck. Approximately 1.5 million 401(k) participants are in the sample in 2025. We sort employees into annual income groups based on their total income in the preceding calendar year. The cut points for the annual income groups are in real 2025 dollars and are inflation-adjusted for prior years.

Source: Vanguard.