Wage Gains Show Signs of Slowing

Friday, April 01, 2022

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(The Wall Street Journal)

Wages continued to grow in March, but the pace has cooled slightly over the past few months, suggesting employers are feeling less pressure to offer pay increases as more people return to the workforce, which could ease inflation pressures.

Average hourly earnings were up a seasonally adjusted 0.4% in March over the previous month, following February’s relatively weak 0.1% rise, the Labor Department said on April 1. In the previous six months, by contrast, monthly wage gains averaged 0.5%.

Economists say the past two months of softer wage growth could signal that the labor market is starting to cool as more people go back to work. The share of the adult population either working or looking for work grew to 62.4% in March, the highest level since March 2020 but still shy of where it stood before the Covid-19 pandemic hit the U.S. economy.

Other indicators also suggest more people are moving into the labor force. The hiring rate—the number of new hires as a share of overall employment—has averaged 4.4% for the past year, higher than the 3.9% average for the year before the pandemic became widespread, according to a separate Labor Department report.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the end of government pandemic-related benefits and the reopening of schools and child-care centers could be contributing to the expanding labor force.

“All of those things would suggest more people coming back to work,” he said. “All things equal, that ought to be reducing wage growth at the margin.”

Wages remain well above where they were a year ago. Private-sector average hourly earnings were 5.6% higher in March than the previous year, the strongest annual gain since May 2020.

Some industries have seen even faster wage growth. Pay for rank-and-file workers in construction was up 6.2% in March, the biggest annual increase in four decades. For those in the transportation and warehousing sector, which has confronted a surge in demand for goods, pay was up 11.1%, the highest jump since records began in 1973.

Rank-and-file leisure and hospitality workers are making 14.9% more than a year ago. But wage gains in that sector have dropped or held steady for three straight months, which could anticipate cooling wage gains in other parts of the economy, said Michael Pearce, senior U.S. economist at Capital Economics.

Slower wage gains could reduce businesses’ motivation to raise prices to offset higher salaries, which could slow inflation growth over time, economists say.

The pace of inflation grew to 7.9% for the 12 months ending in February, according to the Labor Department’s consumer-price index, the fastest since January 1982.

Federal Reserve officials will likely be encouraged by signs of softening wage gains. In March, Fed Chairman Jerome Powell said he was concerned that the extraordinary demand for workers was pushing up prices.

“That’s a very, very tight labor market, tight to an unhealthy level, I would say,” he told reporters following the Fed’s March 16-15 meeting. “We’d like to slow demand so that it’s better aligned with supply,” he added. “And that, over time, should bring inflation down.”

Friday’s report could be a sign that supply and demand in the labor market are starting to find a new balance, Mr. Pearce said. “This is an encouraging sign that these pressures will fade and perhaps fade faster than the Fed has penciled in its forecast,” he said.


Category: Economic News, US News, Wages