Labor report to give Fed look at wage inflation

People walk past the US Federal Reserve building in Washington, DC (AFP)
People walk past the US Federal Reserve building in Washington, DC (AFP)


Other recent data shows rapid growth in paychecks has begun to slow

Worker-pay and benefits data set for release Tuesday will shed light on whether the Federal Reserve is successfully cooling fast wage growth as officials meet to consider further increases in interest rates.

Other recent data has shown that rapid wage growth has begun to slow, putting less pressure on prices. The Fed has aggressively raised interest rates in the past year with the aim of tamping down on the economy to tame inflation. Central-bank officials are starting a two-day meeting Tuesday.

Fed Vice Chair Lael Brainard said in January that she hoped Tuesday’s report would “show the deceleration from the third quarter continuing into the fourth quarter."

Compensation growth is an important factor in the inflation puzzle because it represents a cost employers factor in when setting prices and reflects workers’ ability to pay for more expensive goods and services.

Average hourly earnings for private-sector employers rose 4.6% in December from a year earlier, according to the Labor Department’s latest jobs report. That was down from a recent high annual gain of 5.6% in March 2022. A different Labor Department measurement showed that wage growth had begun to slow or plateau even for the groups making the fastest gains, including those at the low end of the pay scale and young workers.

Employers are estimated to have spent 1.1% more on workers’ salaries and benefits in the fourth quarter compared with the previous quarter, according to economists surveyed by The Wall Street Journal. The rate would continue a slowdown from the previous quarter. The Labor Department is expected to release the Employment Cost Index report at 8:30 a.m. Tuesday.

While some measures of inflation have shown moderation in recent months for both supplier and consumer prices, Fed officials are eager for more evidence that wage growth is cooling, too.

“For Fed officials to be able to sleep at night, they want to see these labor costs come down," said Sarah House, senior economist at Wells Fargo Securities.

The mismatch between the number of open jobs and the number of available workers continues to drive wage gains, economists say. In November, there were 10.46 million unfilled jobs in the U.S., federal data show, or around 1.7 for every unemployed job seeker. Nearly a quarter of available jobs in the U.S. in November were in the retail sector and leisure and hospitality.

The gap has narrowed as job growth slowed last year. Employers added 223,000 jobs in December, the smallest gain in two years. Layoffs were initially concentrated at finance and tech industry companies such as Goldman Sachs Group Inc. and Google parent Alphabet Inc. They now are broadening to other parts of the economy. Dow Inc., Hasbro Inc., and 3M Co. joined the string of companies outlining plans to cut jobs last week.

The labor market nevertheless remains exceptionally tight, with the unemployment rate matching a half-century low at 3.5% in December. Even some companies eliminating jobs in some areas are eager to hire in others.

General Electric Co. is laying off about 2,000 workers from its onshore wind business but is hiring elsewhere in the company. “If you know any welders or machinists, send them my way," GE Chief Executive Larry Culp said last week.

Some companies have indicated they plan to raise wages this year.

Walmart Inc. said last week it would raise starting wages for hourly employees to $14 from $12, and Chipotle Mexican Grill Inc. wants to hire 15,000 restaurant workers in jobs that average $16 per hour. Chipotle bumped its wage scale last year to between $11 an hour and $18 an hour, depending on the location. Delta Air Lines Inc. expects its labor costs to rise as it rebuilds its capacity ahead of the summer travel season and negotiates a new contract with its pilots.

Manufacturing and construction companies continue to work through order backlogs that built up earlier in the pandemic. That is supporting employment and wage growth in those sectors despite signs that higher interest rates and persistent inflation is causing demand to ease.

Eric Sedensky, facility and operations manager at American Leakless Company LLC, got a more than $4,000 raise at the end of last year—the same as everyone else at the company, which makes gaskets as a supplier for Honda Motor Co. The company, based in Athens, Ala., within a cluster of other auto sector businesses, has struggled to remain fully staffed.

“We’re in an extremely, fiercely competitive labor market," Mr. Sedensky said. “Everyone around us was just offering outrageous sums for people to come work for them, and we were not competitive at all in terms of wages" until the recent pay bump.

The competition wasn’t just coming from other automotive businesses—local restaurants and retail were also offering competitive wages relative to American Leakless’s starting pay for hourly manufacturing workers. The company is planning to increase its head count in 2023 by about 10 or 20 workers and saw its old pay scale as an impediment to recruitment.

“We had to make a substantive change to the pay structure," Mr. Sedensky said.


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