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Will Moderating Wage Growth Ease Inflation Fears? – Analysis

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The biggest question analysts will be asking with the June jobs report is whether wage growth is continuing to moderate. Wage growth has already slowed sharply from its annual pace of more than 6.0 percent last fall to a 4.4 percent rate in more recent months. This slower pace of wage growth is far less frightening to the Fed and others concerned about inflation.

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There is also the question of whether the unemployment rate will match its 50-year low of 3.5 percent, after being stuck at 3.6 percent for the last three months. It would be ironic that at a time when the media are filled with stories of recession, the unemployment rate is hitting its lowest level since 1969.

Moderating Wage Growth

The inflation story that has the Fed and others worried is one where wages and prices chase each other upward. This is the wage-price spiral that we saw in the 1970s. The recent wage data do not support this view. The annualized rate of wage growth, comparing the last three months (March, April, and May) with the prior three months (December, January, and February), was 4.4 percent. That compares to an annualized rate of 6.1 percent, comparing the fall (August, September, October) to winter (November, December, January).

If wage growth continues to moderate, it would be hard to argue that the Fed needs to aggressively hike rates going forward. We cannot have a wage-price spiral when wage growth is slowing. The recent rate of wage growth is only a percentage point higher than the 3.4 percent rate in 2019 when inflation was below the Fed’s 2.0 percent annual rate. The composition effect—the impact of large numbers of lower paid workers getting rehired—goes in the opposite direction, slowing wage growth more last year than in recent months.

Wage Slowdown is Sharpest in Leisure and Hospitality 

Lower paid workers have seen the strongest wage growth in the pandemic. The average hourly pay for production and nonsupervisory workers in the leisure and hospitality sector has risen by 18.5 percent since February 2020, far more than the pace of inflation over this period.

However, the rate of wage growth in this sector has also slowed in recent months. The annualized rate of growth had been almost 13.0 percent at the end of 2021; it slowed to 9.5 percent in the most recent period. This slowing is likely to continue in June.

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Job Growth Likely to Slow

We are likely to see job growth at a more normal pace, in the 200,000 to 250,000 range, in June, down from 390,000 added in May, as the labor market is looking pretty similar to its pre-pandemic state. The number of weekly jobless claims has increased from the 50-year lows hit in the spring, but the current pace, in the range of 220,000 to 230,000 a week, is still consistent with a strong labor market.

Even with a more modest pace of job growth, the private sector may surpass its pre-pandemic employment level. In May, it was only down 207,000 jobs from its February 2020 level.

Hard-Hit Sectors Likely to Lead Growth

The strongest job growth is likely to still come to sectors hit hard by the pandemic, such as restaurants, hotels, and arts and entertainment. Contrary to what is widely asserted, employment in air transportation is already 6.0 percent above the pre-pandemic level, but the sector should also see strong job growth in June.

The state and local government sectors, which added 52,000 jobs last month, are also likely to have strong growth, as employment is still far below pre-pandemic levels. The low-paying childcare and nursing home sectors, which have seen large drops in employment since the pandemic, should show modest job gains in June, as workers may have fewer alternatives.

Evidence of  Impact from Higher Mortgage Rates 

There may be some evidence of the impact of the jump in mortgage rates in the June data. We know residential construction slowed in May, which could mean the growth streak in construction jobs has come to an end. There may also be a drop in banking employment as the mortgage refinancing boom has collapsed. There may also be some decline in the number of workers employed in the real estate sector.

Unemployment Likely to Edge Lower

With the prime age (ages 25 to 54) labor force participation rate back to its 2019 average, further job gains should mean a reduction in the unemployment rate. In any case, there is always random error in the Current Population Survey, which means that the reported rate of unemployment can edge lower (or higher) even if there is no change in the actual rate of unemployment. Anyhow, there is a good chance we will see the unemployment rate or below its 50-year low in June.

Share of Unemployment Due to Voluntary Quits May Edge Higher

Even as employers’ complaints about difficulty in hiring were being widely reported, the share of unemployment due to people voluntarily quitting their jobs never reached extraordinary levels. The peak of 15.1 percent in February was still below levels hit just before the pandemic and in 2000. The share fell back to 12.8 percent in May, which is not especially high. There is random error in this measure, so it may edge higher in June, but it is not likely to reach levels that raise fears of an excessively tight labor market.

Average Weekly Hours Stabilize

Last year, when employers were having trouble hiring workers, they increased the length of the workweek for the workers they had on staff. The increase in average hours has been largely reversed. The average workweek has been at 34.6 hours for the last three months, down from a peak of 35.0 hours in January, although still higher than the 34.4 hour average for 2019.

Lower Unemployment for Black and Hispanic Workers

The most disadvantaged groups in the labor market generally see the largest benefit from low unemployment. As the labor market tightens further, we should see improvements in the unemployment rate for Black and Hispanic workers. At 3.2 percent, the unemployment rate for white workers in May stood 0.2 percentage points above its pre-pandemic low. The 6.2 percent unemployment rate for Black workers was 0.8 percentage points above its pre-pandemic low, while the 4.3 percent rate for Hispanic workers was 0.3 percentage points higher than its low point before the pandemic.

Self-Employment May Edge Downward

Self-employment has remained far above pre-pandemic levels, even as the unemployment rate has fallen to near 50-year lows. This suggests that people are self-employed by choice. The May figure was 1.1 million higher than the average for 2019. We may see some decline in June just because the monthly data are erratic.

June Should be a Solid Month for Jobs

We should see healthy job growth and low unemployment in June. If wage growth continues to moderate, it should alleviate concerns about a wage-price spiral and the need for an aggressive pattern of rate hikes by the Fed.

This first appeared on Dean Baker’s Beat the Press blog. 

Dean Baker

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

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