The rapid wage growth U.S. workers have come to enjoy – and that’s left businesses scrambling to keep up – likely isn’t retreating any time soon.

The February jobs report on Friday is forecast to show average hourly earnings advanced another 0.5 percent last month, pushing the year-over-year gain to 5.8 percent. Excluding two pandemic-distorted prints in 2020, the annual increase would be the strongest in data back to 2007.

While some slowing is expected, wage growth is poised to remain exceptionally strong in 2022. Along with soaring commodities prices since Russia’s invasion of Ukraine, high labor costs are yet another factor the Federal Reserve will have to contend with as it prepares to raise interest rates to tamp down inflation.

Economists at Goldman Sachs estimate average hourly earnings to rise at a pace of 5 percent or more through the rest of the year. For perspective, before the pandemic, when the unemployment rate was even lower than it is now, wages were increasing at a rate of about 3 percent.

It’s no surprise wage growth has accelerated in recent months. The U.S. economy has roared back to life, but many businesses don’t have enough staff to keep up with demand. While millions of workers have returned to the labor force, many others remain on the sidelines.

“While labor supply has improved in the last six months, demand is just much stronger,” said Aneta Markowska, chief financial economist at Jefferies. “And I think that will continue to be the case.”

Economists expect another solid jobs report for February. Job openings are hovering near record highs, reflecting elevated levels of vacancies in a variety of industries including manufacturing, government, health care and food services and accommodation. In December, about one in 10 jobs in the leisure and hospitality sector were unfilled.

Wage growth has been particularly robust for the lowest-paid workers but is also broadening to workers higher up the income ladder. Job switchers have also seen stronger pay gains than those who stay, according to the Atlanta Fed’s Wage Growth Tracker, stoking rapid employee turnover across sectors.

A marked slowing in wage pressures would require either a significant increase in labor supply or a reduction in labor demand. Ryan Sweet, head of monetary policy research at Moody’s Analytics, expects wage growth to moderate in the second half of the year – though remain robust – as declining COVID-19 cases and easing restrictions pull more people back into the labor market.

“We have a boatload of jobs,” Sweet said. “It’s just the labor supply.”

Often, it’s not as simple as offering higher wages. An Atlanta Fed study found employers struggling to fill jobs would be better off offering flexible work arrangements and other incentives to younger workers because pay increases aren’t enough to lure them back.

While some white-collar occupations can offer flexibility or remote work, many occupations – like those in food services, manufacturing or health care – require employees to be in person and often on a fixed schedule.

Nearly three-fourths of Texas manufacturers expect wages and benefits to increase in the next six months, the highest in data back to 2004, according to a Dallas Fed survey in February.

“The solution to high wages is higher wages because we’ll start to hit more and more people’s reservation wage or that wage that people need to give up their leisure time and come back into the labor force,” Sweet said.

Strong wage growth now will pull people in over the next 12 to 18 months, Sweet said. “Inflation drives wages” and when Americans see prices for gas and groceries going up, they ask for a raise, he said.

Many workers have not seen their incomes keep up with inflation. Consumer prices rose 7.5 percent in January from a year earlier, the fastest pace in four decades. Economists expect that’ll worsen further before steadily easing as the year goes on.

However, Russia’s invasion of Ukraine has injected uncertainty into the global inflationary picture. Oil prices have surged and food costs are poised to rise – staples and a significant part of Americans’ budgets, especially for lower-income households.

“My baseline forecast coming into this week had been that we would see wages growing faster than inflation by the end of this year,” said Bill Adams, chief economist at Comerica Bank. But depending on what happens to food and energy prices, “that might no longer be the case.”

For the Fed, the impact of wages on inflation will continue to be a key issue.

In testimony to lawmakers Wednesday, Chair Jerome Powell noted the decline in labor force participation is “certainly something that’s now contributing to wage inflation and actual inflation and to the labor shortage that we’re currently seeing.”

Copy the Story Link

« Previous

Wheat, corn prices surge amid Russia’s invasion of Ukraine

Next »

IRS rushes to hire 10,000 workers but giant backlog expected to persist through 2022