U.S. Labor: The Fear of Wages

Wages definitely have begun to accelerate. It’s hardly to the point of a dreaded wage-price inflationary cycle, but it may well be enough to strengthen convictions at the Federal Reserve that it is time to gradually raise interest rates, reduce flows of liquidity into the economy, and so forestall any future inflationary pressure. The Fed no doubt looks at an array of indicators. Its recent release discussed improvements in labor markets and home sales, as well as property values. But whether monetary policymakers mention wages and labor costs or not, they surely watch them.

Over the most recent 12 months, total compensation of American workers, as reported by the Labor Department, rose just more than 2.1%.1 That is considerably faster than the 1.8% averaged over the prior 12 months. Compensation advances have averaged less than 2.0% a year ever since this recovery began in 2009. It is just in this most recent period that it has picked up. The acceleration, if anything, is clearer when abstracting away from benefits and looking at wages and salaries alone. These have advanced 2.6%, up from the 1.8% recorded in the prior 12 months. This is significant, for the wage and salary figures better reflect underlying economic and labor market conditions than do the overall figures, burdened as they frequently are by mandated benefits.

Nor does the move reflect the many minimum wage increases that have gone into effect during this recent period. Such legislation may explain the wage acceleration in the retail sector, where a relatively large proportion of employees work at the minimum wage. There wages and salaries have increased 3.4% during the most recent 12 months for which data are available, up from the 1.7% in the prior 12 months. (It is interesting that wages were rising faster in this area than overall wages were rising even before these minimum increases were put into effect.) But in other areas, where minimums mean little, there are even stronger gains. Construction wages and salaries have risen 2.4% in the recent period, up from 1.1% in the prior 12 months. In information services, they have picked up markedly, rising 1.8% on average during the most recent 12 months, up from 1.5% in the prior 18 months. Wages and salaries in financial services rose 2.4% in the most recent 12 months, up from only 2.0% in the prior period. Even wages in natural resource extraction have held their rate of advance despite the fall in oil prices. Wages and salaries there have risen 2.0% during those most recent 12 months, about the same as in the prior 12 months.

What might grab the Fed’s attention even more than these comparisons is the sluggish growth in labor productivity. According to the Labor Department, output per hour has only grown 0.2% during the most recent 12 months for which data are available. That compares with 0.5% during the prior 12 months and 1.2% during the 12 month period before that. So not only are wages accelerating but also the output per hour is decelerating. The cost per unit of output—what the Labor Department calls unit labor costs and the most direct measures of pressure on producers to raise prices—has, accordingly, accelerated that much faster from a growth pace of 0.2% in 2013 to 1.6% over these most recent 12 months.

None of this suggests a runaway inflation or even much immediate inflationary pressure. It does, however, put the Fed and the investment community on notice that this matter is not so distant or abstract as it once was. If it does not yet call for immediate portfolio responses, it does call on the Fed to begin the policy changes as promised. No doubt policymakers have noticed.

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