Weekly Economic Trends & Indicators

The Headline

Wage growth slowed for the third consecutive month in January, according to the Bureau of Labor Statistics. Average earnings across all private (non-government) occupations were $33.03 per hour, up from $32.93 per hour in December.

The Details

Average hourly earnings are useful for gauging how much the average worker is gaining in income due to economic growth. In today’s inflationary environment, average earnings also reflect the inflationary pressure in the economy as workers demand higher wages when prices are rising. During the height of COVID-19, rapid changes in the composition of the workforce made earnings less reliable as an indicator. However, now that most of the jobs that were lost during the pandemic have returned, average hourly earnings can once again provide some important insight.

The Context

At the height of the pandemic, average hourly earnings jumped, not due to actual wage increases, but due to the fact that so many low wage service sector jobs (e.g. restaurant, travel, tourism, etc.) were temporarily lost. The elimination of so many low paying jobs put more weight on the remaining higher wage jobs and artificially pushed up the average temporarily. As those jobs came back, average earnings moved back toward the pre-pandemic trend.

However, by early 2021 we started to see an increase in the trend growth rate that was correlated with the onset of consumer price inflation. Throughout 2022, monthly increases in average hourly earnings were consistently more than 0.34%, which translates to over a 4% annual rate of wage growth.

Such wage growth exceeded the pre-pandemic rates but was still not keeping up with inflation. Many employers were reluctant to raise wages for existing employees. As a result, workers began shopping around for higher paying jobs. The much discussed “labor shortage” caused significant churning in the labor market last year.

As we move into 2023, things are beginning to change. Interest rate increases by the Federal Reserve have begun to slow inflation, and labor demand has stabilized. This has shifted some of the bargaining power in wage negotiations from the employees back to the employer. The rise in average hourly earnings from December to January was the smallest monthly increase in almost a year. As the market continues to add back jobs that were lost to COVID-19 and inflation continues to fall, we will likely see average earnings normalize and return to the pre-COVID trend. As labor demand gradually softens, as is expected this year, it will be more difficult for employees to improve their wages by changing jobs. This will have the effect of further weakening inflationary pressures in the economy, which is the goal of the Federal Reserve.

Next week: International trade issues.