US price inflation may capture the most attention in terms of upcoming Federal Reserve policy decisions, but wage growth continues to gain momentum and shows no signs of slowing down. That’s flashing a warning sign to central bankers, as today’s minutes from the last FOMC meeting highlight: “Various participants cited other developments that had the potential to place additional upward pressure on inflation, including real wage growth in excess of productivity growth.”
The Atlanta Fed’s Wage Growth Tracker (new data out today) shows the underlying dynamics of what’s driving wages higher and how long that could persist. We have three points on this data:
#1: Three-month moving average of overall median wage growth (hourly data) back to 1983:
- Overall annual wage growth climbed to 5.1 pct last month, the highest it has been since August 2001.
- The record high was 6.1 pct in March 1983, the start of the time series.
- The gray bars in the chart below indicate recessions; wages only fell significantly after each one over the last 4 cycles.
Takeaway (1): wages have been accelerating rapidly and still have room to run relative to history. The peaks in the early 1980s (6.1 pct), early 1990s (6.0 pct) and early 2000s (5.4 pct) are all higher than the current rate of 5.1 pct.
Takeaway (2): it usually takes a recession to put meaningful downward pressure on wages. That was the case in the early 1990s/2000s, mid-2000s and in 2020. The one exception was in the 1980s, as shown on the left side of the chart above. This is the scenario today’s Fed would like to see, as overall inflation and wages came down as the economy expanded. The risk: The 1990s and 2000s proved wage inflation could remain high until a recession takes it lower.
#2: Three-month moving average of median wage growth (hourly data) for job stayers and job switchers back to 1997:
- Wage growth for job switchers rose to 5.8 pct last month, the highest it’s been since September 2001. The record high was 6.7 pct in September 1998.
- Wage growth for job stayers increased to 4.7 pct in January, the highest it’s been since December 2001. The record high was 5.2 pct in April 2001.
Takeaway: the late 1990s/early 2000s experience shows wage growth for job switchers could remain elevated (5-7 pct) for years. The difference between now and then is that the wage growth for job stayers has kept better pace with the rise in job switchers. The reason: job openings and quits are at record levels and far higher than the early 2000s. Job openings are also much higher than the number of unemployed workers, whereas there were more unemployed workers than job openings in the early 2000s. That puts even greater upward pressure on wages as employers try to both attract and retain workers amid widespread labor shortages.
#3: Twelve-month moving average of median wage growth (hourly data) for those with a bachelor’s degree and a high school degree back to 1997:
- Wage growth for those with a high school degree rose to 4.4 pct last month, its highest level since June 2002. The peak was 5.1 pct in May 2001.
- Wage growth for those with a bachelor’s degree increased to 3.8 pct, its highest level since August 2020. The record was 6.2 pct in April 1999.
Takeaway: wage growth for those workers who ended their formal education with a high school degree has exceeded those with a college degree since January 2021, an unprecedented length of time for that to happen relative to history. The opposite has almost always been true except for a few brief months in the mid to late 2010s. This imbalance highlights where the labor shortage is most severe, which is in jobs that do not require higher education. As a result, wage growth is wider in scope across all skill levels.
Bottom line: history shows wage growth can climb higher from here, and the ongoing labor shortage points to that happening. The past few cycles show it has taken a recession to tame wage inflation, the very outcome the Fed is trying to avoid as it tightens monetary policy to bring down price increases. On the plus side, the 1980s show it’s not impossible. That does not make this challenge any less easy, however.