Wages Start to Outpace Inflation
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Fiscal policy (i.e. government spending) and monetary policy (central bank control of money supply and interest rates) are commonly blamed for inflation, but there is another reason why inflation has been running so hot over the past few years: people are earning more money. And when people earn more, they spend more, which has a multiplier effect throughout the entire economy as those spent dollars bounce from place to place to place. Rising wages are, of course, generally a good thing. The only problem is when inflation itself outpaces wage growth, thus negating the benefits of those higher wages.
In the month of May, American workers collectively earned $11.7 trillion. This figure was up $60 billion from one month prior and up $534 billion from one year prior. In June, the average hourly wage nationwide rose to $33.58/hour, an all-time high (non-adjusted for inflation). One year ago, the average hourly wage was $32.18/hour, which means that wages have risen by 4.4% in the last year. In June 2019, the last comparable June prior to the pandemic, the average hourly wage was $27.94/hour, which means that wages are now 20% higher today than they were four years ago. Notably, on a percentage basis the gains have been more significant at the bottom and middle tiers of the wage spectrum as workers in fields such as retail, restaurants, and hospitality have been in such high demand along with healthcare, construction, and certain government jobs including municipal workers everywhere from police and fire to public works and administration.
But all of this wage growth has been part of a cycle: inflation drives prices up, workers demand greater wages to keep up with inflation, and the spending of these higher wages helps to beget further inflation from all of the increased spending. The story may be changing however: the month of June showed wage growth that was actually stronger than inflation, which according to this past Wednesday’s CPI report came in at 3.0% for the month of June on a year-over-year basis. This was the lowest annual inflation rise since March 2021. Even further good news to workers, wage growth has been even stronger comparatively speaking in the last three months, as according to the Federal Reserve of Atlanta, the three-month rolling average of wages is up by 5.6%:
So why are wages rising? It is really simple math: there are not enough workers to do the work so employers must pay more to attract and retain talent. The reasons for not having enough workers are many, ranging from demographics (i.e. an aging population, many of whom retired during COVID), lower birth rates, and a decline in net migration to the United States, which was particularly impacted by COVID-19 and the concurrent global travel restrictions plus tighter immigration policies under the Trump Administration. According to the U.S. Census Bureau, net migration to the United States added just 247,000 people to the country’s population between 2000 and 2021; in 2015-2016, on the other hand, net migration was +1,049,000. While people’s views on immigration may vary politically, this decline in in-migration represents fewer workers in the labor pool.
Another reason wages may be accelerating relative to inflation is that salaries are typically only negotiated annually. Most workers probably get a raise once a year, likely either at the start of the calendar year or in June near the end of the fiscal year for many companies and other entities. Most labor contracts are negotiated even less frequently, perhaps once every two or three years. And you can bet that workers and unions are opening their negotiations with the fact that inflation has been running at 7-8% for much of the last year. Workers have understandably wanted a raise just to keep pace with that figure.
Well now inflation is still top of mind (and at the top of negotiations) even though it is, in fact, declining. The lag between perception and reality may be why raises are now actually outpacing inflation; inflation is on its way down, but negotiators are still leveraging it in salary discussions.
If inflation does continue to moderate, will workers be able to command larger and larger raises? The contracting labor pool due to demographics and other factors may provide some tailwinds to provide employees with negotiating power as there still are just not enough workers. The economy remains pretty strong. So workers are still in a pretty good bargaining position. One study from last year found even greater salaries bumps for workers who switched jobs versus those who stayed in the same job, so people are moving around too.
Rising wages, ironically, probably give the Federal Reserve a fair amount of consternation about the the state of future of inflation. Ideally (those heartless bureaucrats) at the Fed probably want to see wages moderate along with inflation, as the rising wages still have the likelihood of continuing to boost spending, which could also lead to more of the very thing the Fed is trying to rein in: inflation.
For now, however, the data shows that wages rose by 4.4% year-over-year in June and overall inflation only rose by 3.0%. This is good news for weary workers who have seen so much of their paychecks getting eroded at the grocery store, the pump, to pay for utilities, and any one of the high-rising expenses over the past year. I expect inflation to continue to moderate over the next few reports, so the gap between rising wages and easing inflation is likely to become even more pronounced between now and the end of the year.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. © Ben Sprague 2023.
Weekly Round-Up
Here are a few things that caught my eye this week that I thought might interest you too.
Dallas, Texas has banned short-term rentals in single-family neighborhoods. Read more here.
Here in my hometown of Bangor, Maine, the City Council has announced a forum on July 27th to discuss possible regulations to short-term rentals. Technically rentals shorter than 30 days are not allowed in Bangor, but there are dozens if not hundreds of these units operating now. So clarity is needed for property owners, tenants, and neighbors.
Via The Hill, 30% of Americans are now living alone. Says Eric Klinenberg, a sociologist at New York University: “It’s just a stunning social change…I came to see it as the biggest demographic change in the last century that we failed to recognize and take seriously.”
Morningstar believes the Fed will start cutting interest rates in February 2024. Read more here.
The Wall Street Journal recently had an entertaining four-part podcast series on the history of Marvel movies. It was particularly timely for us as my son and I just watched the first Spiderman movie (the one from 2002) when we were in New York last week for a track meet. Then we listened to all four podcast episodes on the ride home to Maine, which helped the time to pass a little bit more enjoyably. Here is a link to the first episode. My son did great with his 800m race by the way - thank you to people who sent nice encouraging messages last week!
It is a busy weekend in our household with both my wife and daughter celebrating their birthdays, both beautiful in yellow in the back yard.
Have a great week, everybody!