February 7, 2020

Average  hourly earnings rose 0.2% in January to $28.44 after gaining 0.1% in December and 0.4% in November.  Hourly earnings are gradually accelerating slowly.  During the past year hourly earnings have risen 3.1%.  Earnings would be growing more quickly except for the impact from retiring baby boomers.  When you lose a number of people who have been working for 40 years who are making high wages, and replace them by younger workers who are making much less, this series will have a downward bias.  The Atlanta Fed has a series called “wage tracker” in which it tries to adjust for this bias and it believes that wages are currently rising at a 3.7% pace.  This series has been growing somewhat more quickly than the official hourly earnings data for some time and, therefore, seems more consistent with the apparent tightness in the labor market.

In addition to their hourly wages workers can also work longer hours and/or overtime.  Increases in their total income are captured by the increase in weekly earnings.  Weekly earnings rose 0.2% in January to $975.41 after rising 0.1% in both November and December.  Average weekly earnings have risen 2.5% during the course of the past year.  Wages  appear to be rising at a moderate pace consistent with a sustained 2.5% pace of consumer spending.

The potential impact on inflation from the tight labor market is best demonstrated by looking at unit labor costs which are labor costs adjusted for the changes in productivity.  In the past year these unit labor costs have risen 2.4% consisting of a 4.2% increase in compensation partially offset by a 1.8% increase in productivity.  Keep in mind that the Fed has a 2.0% inflation target.  If labor costs adjusted for productivity — which account for about two-thirds of a firms overall costs —  are rising at a 2.4% pace it is likely that the inflation rate will begin to climb more quickly in the  months ahead.

Stephen Slifer


Charleston, SC