Wage growth has increasingly shared the spotlight in recent monthly jobs reports with the headline unemployment rate and the number of new jobs created. On Thursday, with the release of the June jobs report, wages will essentially be the sole focus.
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The unemployment rate is expected to hold steady at 5.5% even as the economy generated another 230,000 or so new jobs, a pretty solid figure for monthly job creation. The rate will likely stay the same (and not drop) because more and more people are entering the workforce, encouraged by a sharp increase in higher-quality, better-paying jobs.
But all eyes will be on wage growth. Here’s why.
Economists have long predicted that as the U.S. recovered from the deep recession following the 2008 financial crisis that job creation would perk up and it has. The U.S. has generated an average of 251,000 new jobs each month during the past year, according to the Labor Department. In May, the U.S. added an especially-strong 280,000 new jobs.
That strong job growth momentum has brought the unemployment rate down to 5.5% from 10% in October 2009 at the height of the recession.
Yet even as job growth accelerated and the unemployment rate fell wages remained stagnant.
The reasons wages weren’t rising in tandem with job growth and the declining unemployment rate was a phenomenon economists call labor market ‘slack.’ Slack occurs when lots of people who have jobs want better jobs – either full-time positions or better paying jobs with more comprehensive benefits.
When employers know that a large pool of workers is available to fill their full time openings they don’t have to raise wages to fill those jobs. That’s been the case for several years and it’s kept wages stagnant.
Now that’s changing.
Wages Are the Key to Lifting Inflation
Earlier this month the Labor Department reported that the number of job openings at the end of April stood at 5.4 million, the largest number since the government started keeping track in late 2000. Meanwhile, hiring fell to 5 million in April down from 5.1 million a month earlier, a drop economists said occurred because employers are having difficulty finding the qualified workers they are seeking.
It comes down to simple supply and demand: once employers start having difficulty filling positions they will need to raise wages to attract qualified workers.
In May hourly wages rose by 2.3% from a year earlier, a pretty solid figure and one that suggests wages are finally starting to rise significantly, although not quite at the 3% annual rate the Federal Reserve would prefer.
The Fed – and all economic data these days leads us to the “data-dependent” Fed – says 3% annual wage growth is needed to lift inflation to the central bank’s 2% target rate. While those figures haven’t been reached yet, the momentum seems headed in that direction.
And all of these numbers are being scrutinized to help the Fed determine the timing of the first interest rate hike in nearly a decade.
The Fed has been reluctant to raise rates for fear that prematurely raising borrowing costs could push the economy back into recession. The Fed has said it won’t raise rates until unemployment hits a range of 5.2%-.5.6% (it has) and inflation reaches 2% (it hasn’t).
Now wages are finally moving higher which should nudge inflation toward that Fed goal, just as central bank economists predicted it would, allowing them to raise rates later this year if everything remains on track.