The U.S. Labor Market and Compensation Trends

Factors Affecting Pay and Labor Demand and Supply

Labor demand and labor supply are affected by a variety of factors that directly impact pay. Let’s review these concepts relative to labor market trends.

Labor Demand

Labor demand is characterized by external environmental or social influences that determine the quantity and quality of employees required by employers. Overall, changes in the demand for labor are the most prominent reasons for the increased pay inequality due to the following:

Skill-based technology. Advances in technology have increased efficiencies across all jobs and industry sectors. Industrial manufacturing processes are more automated, and the administrative and related business services sectors have also become more efficient with automated processes. Employees must now have specialized skills and be critical thinkers. The increased demand for these kinds of employees has resulted in a labor supply shortage. Productivity effects are from combined hardware and software advances in technology.

There is some argument about whether there is a shortage of qualified STEM workers, but what is less reported is that there is a shortage of skilled manufacturing and trades workers.

The number of manufacturing companies has fallen by about 25% since 1997. However, manufacturing plant construction spending was $200 billion in 2025, part of historical spending levels since 2023. A big part of the spending is for building plants for semiconductor production, but some companies are either bringing production home or supplementing their overseas production with plants in the U.S. to lessen disruptions in their supply chain and be closer to customers. The focus is on state-of-the-art manufacturing and automation such as additive manufacturing.

Tax Incentives. State and local governments sometimes compete for large businesses to establish themselves in their area by providing tax incentives. If they are successful, this can create high demand for workers with the right skills. Employers also may not choose a location if local corporate taxes are too high.

Global trade. Global trade has had a major effect on two fronts. The first relates to imports. The United States imports many goods that require low skills to produce, and this has reduced the demand for low-skilled employees in America. This shift has created an oversupply of low-skilled employees, which has led to reductions in real wages. The second part deals with job exports or offshoring. The most common example of this is U.S. companies establishing their production facilities in foreign countries.

Growth of services. The The growth of services and the decline of manufacturing as a percent of Gross Domestic Product (GDP) has coincided with globalization and job offshoring that has resulted in many jobs being “transferred” to other countries. Workers who have had their jobs offshored need to develop new skills to qualify for opportunities that are being created in other and often entirely new industries. It may even require taking a pay cut if they switch to a services job, but there are some services that employ highly skilled workers. These types of services are expanding, but the jobs typically require significant training (e.g., healthcare or computer/data jobs).