What to watch on jobs day: Wage growth continues to lag inflation
Tomorrow, the Bureau of Labor Statistics (BLS) will release the latest numbers on the state of the labor market. Given fiscal investments at the scale of the problem over the last two years and the resulting trends in payroll employment growth and labor force participation, the labor market is on track for a historically fast and full recovery by the end of 2022.
Even the reported contraction in gross domestic product (GDP) in the first quarter of 2022 won’t push this recovery off track. Most of the slowdown in GDP was due to weak exports (which reflect weakness in trading partner economies, not our own) and to a running down of business inventories, which had been built up at a furious pace in recent quarters. Looking at final sales (so stripping out the inventory effect) to domestic purchasers (so stripping out exports), growth was actually a bit faster in the first quarter of 2022 than it was at the end of 2021.
Moving forward to jobs day, it’s vital to keep tabs on job growth as well as participation to make sure the recovery keeps going strong and reaches all corners of the labor market. It’s also important to track the sectors with particularly large job deficits—like leisure and hospitality—but also state and local jobs, which have had a shallower fall and a slower recovery than the private sector.
Another important metric for a read on the health of the economy and what the Federal Reserve should be doing in the coming year is nominal wage growth. To date, the large increase in inflation since early 2021 has clearly not been driven by labor market trends. In fact, despite being high relative to the recent historical past, nominal wage growth today by every measure is lagging inflation, leading to real wage losses for workers. This is very different than the behavior of wages in previous periods when the unemployment rate was very low and the economy was heating up.
This lagging of nominal wage growth behind price growth has actually dampened inflation so far in this recovery. Tracking this growth going forward is key to deciding whether inflation will stay very high (or even accelerate) or will begin to relent.
In a recent report, Jori Kandra and I highlighted the importance of accounting for the changing composition of the workforce to more accurately measure what’s happened with wage growth in the U.S. economy. Because lower-wage workers were pushed out of the labor market, average wages mechanically rose in 2020. Then, as lower-wage workers returned to the labor market, average wages fell.
Here, we delve deeper into recent trends in wage growth using several different measures to get a sense of the changing nature of wage growth in recent months and for context in considering Federal Reserve policy moving forward. As we show below, this composition effect is largely done influencing aggregate wage trends, and just looking at headline numbers on wage growth from the monthly jobs report going forward will likely provide good guidance for policymakers.
In Figure A, we report year-over-year changes in wages using five different measures: nonfarm business hourly compensation from the BLS productivity series, average hourly earnings for all workers from the Current Employment Statistics (CES), average hourly earnings for production and nonsupervisory workers from the CES, industry composition-adjusted average hourly earnings for all workers, and the employment cost index. We average over quarters for measures not reported quarterly. The first three measures do not composition adjust. Here, you can see the significant uptick in wages in 2020, slower growth in late spring/early summer 2021, and relatively steady growth the last six months.
The last two measures adjust for composition: The employment cost index measures the change in the cost of labor, adjusted by the BLS to be free from the influence of employment shifts among occupations and industries, and our created composition-adjusted average hourly earnings for all workers holds constant February 2020 industry mix in the months that follow. Both of those measures even out the huge spike in wages in 2020 and show a less pronounced fall in mid-2021. All measures show a relatively smooth level of wage growth over the last six months or so. In short, composition, no longer seems to matter much for assessing wage growth trends.
Wage growth has stabilized as the labor market returns to pre-pandemic composition: Year-over-year wage changes, alternative measures, 2018–2022
| Year-over-year | Employment cost index (ECI) | Hourly compensation | Average hourly earning (all employees) | Average hourly earning (production and non-supervisory employees) | Composition-adjusted average hourly earnings (all employees) |
|---|---|---|---|---|---|
| 2019-03-01 | 3.0% | 4.3% | 3.4% | 3.5% | 3.4% |
| 2019-06-01 | 3.0% | 4.2% | 3.3% | 3.5% | 3.3% |
| 2019-09-01 | 3.0% | 3.0% | 3.3% | 3.7% | 3.3% |
| 2019-12-01 | 3.0% | 3.9% | 3.2% | 3.5% | 3.2% |
| 2020-03-01 | 3.3% | 3.7% | 3.2% | 3.5% | 3.1% |
| 2020-06-01 | 2.9% | 8.7% | 6.6% | 6.7% | 4.9% |
| 2020-09-01 | 2.6% | 7.3% | 4.9% | 4.9% | 4.0% |
| 2020-12-01 | 2.8% | 8.6% | 4.9% | 5.0% | 4.0% |
| 2021-03-01 | 3.0% | 6.2% | 5.0% | 5.1% | 4.2% |
| 2021-06-01 | 3.6% | 3.4% | 2.2% | 2.8% | 3.4% |
| 2021-09-01 | 4.6% | 6.3% | 4.5% | 5.4% | 4.9% |
| 2021-12-01 | 4.9% | 5.5% | 5.2% | 6.4% | 5.7% |
| 2022-03-01 | 5.0% | 6.5% | 5.4% | 6.7% | 5.8% |
Notes: Our composition-adjusted average hourly earnings for all workers holds constant February 2020 industry mix by weighting by sector-level average weekly hours in the months that follow.
Source: EPI analysis of Bureau of Labor Statistics' (BLS) Current Employment Statistics, Employment Cost Index, and Productivity and Costs public data series.
In Figure B, we report annualized quarterly wage changes for each measure. That is the change from, say, the last quarter of 2021 and the first quarter of 2022, expressed on an annual basis. Here, the spikes in wage growth in 2020 are even more prominent (and short lived). What’s particularly striking is that the composition-adjusted series and the non-composition-adjusted series tell a consistent story over the last three to four quarters: Wage growth has stopped rising and might actually be showing signs of slowing in the last two quarters.
Besides telling us that the large compositional effects of the pandemic on wage growth are now largely behind us, these series tell us that wage growth continues to be slower than inflation, and there’s no real sign of that changing anytime soon. So far, it appears that wage growth continues to dampen price growth rather than feed it.
Quarterly wage growth shows no sign of accelerating this year: Annualized quarterly wage changes, alternative measures, 2018–2022
| Quarter | Employment cost index (ECI) | Hourly compensation | Average hourly earnings (all employees) | Average hourly earnings (production and non-supervisory employees) | Composition-adjusted average hourly earnings (all employees) |
|---|---|---|---|---|---|
| 2019-03-01 | 2.7% | 9.3% | 3.7% | 4.0% | 3.7% |
| 2019-06-01 | 3.0% | 0.8% | 2.3% | 2.9% | 2.3% |
| 2019-09-01 | 3.6% | 0.4% | 3.6% | 3.9% | 3.6% |
| 2019-12-01 | 2.6% | 5.2% | 3.1% | 3.2% | 3.1% |
| 2020-03-01 | 4.1% | 8.7% | 4.0% | 4.2% | 3.4% |
| 2020-06-01 | 1.4% | 21.6% | 16.3% | 16.2% | 9.6% |
| 2020-09-01 | 2.3% | -4.7% | -3.0% | -3.1% | 0.1% |
| 2020-12-01 | 3.4% | 10.6% | 3.2% | 3.4% | 3.3% |
| 2021-03-01 | 4.8% | -0.6% | 4.2% | 4.6% | 4.2% |
| 2021-06-01 | 3.6% | 9.2% | 4.7% | 6.4% | 6.0% |
| 2021-09-01 | 6.5% | 6.3% | 5.7% | 7.2% | 6.0% |
| 2021-12-01 | 4.7% | 7.4% | 6.1% | 7.3% | 6.4% |
| 2022-03-01 | 5.2% | 3.2% | 5.1% | 6.0% | 4.9% |
Notes: Our composition-adjusted average hourly earnings for all workers holds constant February 2020 industry mix by weighting by sector-level average weekly hours in the months that follow.
Source: EPI analysis of Bureau of Labor Statistics' (BLS) Current Employment Statistics, Employment Cost Index, and Productivity and Costs public data series.
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