Are Labor Shortages in Small Cities and Rural Areas Worse Than Urban Ones

Page Menu +

• Archives

In the past, the Richmond Fed has reported about the difficulty of businesses finding workers with the right skills. In conversations with business leaders across the Fifth District, we have heard about labor availability challenges across all geographies: in large urban centers, small cities, and rural areas. This post examines how labor availability differs between small cities and rural areas versus large urban centers. We find that the COVID-19 pandemic made it harder for firms in small cities and rural areas to find workers compared to firms in urban areas. Perhaps because of the increased challenges of finding workers, wage growth dynamics in the Fifth District have shifted: Surveyed firms in small cities and rural areas used to report lower wage growth than urban firms, but that is no longer the case.

Small City and Rural Firms Face Increased Challenges Finding the Right Workers

To understand how easy or difficult it is for businesses to find workers with the right skills, we looked to the Richmond Fed's labor availability diffusion index. Diffusion indexes are often used to summarize responses to surveys that gauge economic activity. In the case of the Richmond Fed's labor availability diffusion index, a positive value means that more firms report that it is easier to find workers, while a negative value indicates that more firms report that it is more difficult to find workers.

The Richmond Fed's business surveys have found that businesses in small cities and rural areas tend to have more difficulty finding workers with the right skills than businesses in large urban centers.¹ This was true before the pandemic where urban businesses were less likely to report difficulty finding workers compared to businesses in small cities and rural areas. (The average diffusion index from January 2017 to February 2020 was -10 for urban businesses versus -14 for small city and rural businesses.) The pandemic made it harder for businesses to find workers, regardless of geographic location, although the degree of difficulty was not even. From March 2020 to December 2022, small city and rural businesses reported much more difficulty finding workers with the right skills than their urban counterparts (-30 for urban businesses versus -50 for small city and rural businesses).

Although finding workers across geographies has improved since the start of 2023, progress has not been uniform. Businesses in urban areas reported more improvement and, in some cases, even conveyed that it was easier to find the workers with the right skills. Businesses in small cities and rural areas also reported easing labor availability, but not to the extent reported by businesses in large cities.

Table 1. Compared to the previous month, how have the following aspects of your business activity changed? Availability of employees with the skills needed by your company
Average Diffusion Indexes Across Time Period, 3-Month Moving Average

Urban	Small City and Rural
Pre-COVID (Jan 2017 - Feb 2020)	-10	-14
COVID (March 2020 - Dec 2022)	-14	-20
Post-COVID (Jan 2023 - July 2024)	0	-9

Business leaders in small cities and rural areas have spoken to us at length about the difficulty of finding workers over the past few years. Challenges finding workers led businesses to increase wages, offer signing bonuses, and find other ways to recruit and retain workers. In July 2023, a southwest Virginia-based energy company reported that for every two people they hired, they lost one. Last August, a coastal food manufacturer reported that they faced such difficulty finding workers that they were considering moving some operational locations. A different food manufacturer told us that the shortage of skilled workers led them to offer a five-figure resigning bonus to lure back a recently departed employee, which the employee turned down.

Annualized Wage Growth in Small Towns and Rural Areas Surpasses Urban Areas

Wage growth, as reported by firms in our survey, historically has been higher for businesses in urban centers than for businesses in small cities and rural areas. This finding corresponds with data from the Atlanta Fed's Wage Growth Tracker and the New York Fed's Equitable Growth Indicators report. At the onset of the pandemic, urban firms in the Richmond Fed's business surveys reported average annual wage growth that reached almost 8 percent. During the same period, businesses in small cities and rural areas reported lower annual wage growth. Starting in mid-2021, reported wage growth in small cities and rural areas increased and started to match reported wage growth in urban areas. In the beginning of 2022, we started to see reported wage growth in small cities and rural areas exceed urban areas. Since the beginning of 2023, the average reported annual wage growth has generally been slightly higher for firms in small cities and rural areas (5.6 percent) than urban areas (5.0 percent).

Table 2. Looking back, how do average wages compare with this time last year?
Average Percentage Change Over Time Periods, 3-Month Moving Average

Urban	Small City and Rural
Pre-COVID (Jan 2019 - Feb 2020)	3.4%	2.8%
COVID (March 2020 - Dec 2022)	5.4%	4.6%
Post-COVID (Jan 2023 - July 2024)	5.0%	5.6%

This acceleration in reported wage growth for businesses in small cities and rural areas corresponds with the increased difficulty of finding workers with the right skills. It is possible that these small cities and rural areas did not have the labor force to accommodate labor demand, driving up wages as businesses competed for a small pool of workers.

But there might be a change on the horizon. By late spring and summer of 2024, some small city and rural businesses noted slight improvement in their ability to find workers. In July 2024, a southeastern Virginia manufacturer noted that labor had eased somewhat, and "the dust has started to settle" on skilled trades tightness. They were able to fill welding and engineering positions that had long been open and were optimistic that above-normal wage increases were done. This was consistent with the August 2024 report of a southwest Virginia business owner who reported that in the last few months, it was easier to find developers in the region than it has been for years.

Final Thoughts

Finding workers with the right skills has been a challenge for Fifth District businesses regardless of location. However, the Richmond Fed business surveys suggest small cities and rural areas tend to have more difficulty finding the right workers than businesses in large urban centers. The pandemic exacerbated this issue, as small city and rural businesses reported more difficulty than their urban counterparts. Unsurprisingly, as firms in small cities and rural areas expressed greater trouble finding workers, their reported annual wage growth increased and eventually surpassed reported wage growth in urban areas. As a part of our work understanding conditions in small cities and rural areas, we will continue to monitor changing business conditions across geographies in the Fifth District.

¹

Views expressed are those of the author(s) and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.