Wages Continue to Grow, Good for Workers but a Worry for the Fed

Wage growth remains strong in early 2023, good news for workers trying to keep up with rising costs of living, but could be a concern for Fed officials trying to keep inflation in check without triggering a recession. there is.

Wages and salaries for US private sector workers rose 5.1% year-on-year in March, up 1.2% from December, the Labor Department said on Friday. This was the same growth rate as his December, beating forecasters’ expectations of a gradual slowdown. The broader measure of compensation growth, which includes the value of benefits as well as salary, actually accelerated slightly in the first quarter.

The Federal Reserve (Fed) has been raising interest rates for over a year to cool the economy and keep inflation under control. Wages are a big piece of that puzzle. Policymakers believe the labor market has far more jobs than it fills, pushing wages up at an unsustainable rate and contributing to inflation. They are trying to strike a delicate balance, discouraging hiring and raising borrowing costs enough to ease pressure on wages, but not so much that businesses start laying off workers en masse.

The results of these efforts have been mixed. Inflation has eased from last year’s highs and economic growth has slowed. Inflation-adjusted gross domestic product grew by only 1.1% annually in the first quarter, according to data released Thursday. Businesses are starting to cut back on job openings, and previously overheated economic sectors such as housing and technology have cooled dramatically.

But inflation is declining more slowly than many forecasters expected, and many economists say the labor market may no longer be boiling, but it is uncomfortably boiling. Wage figures released on Friday tell a similar story. Wages have not risen as rapidly as they did in the middle of last year, but they are rising much faster than before the pandemic.

Federal Reserve officials were already expected to resume rate hikes at next week’s meeting, but Friday’s wage data cleared any remaining doubts, according to Inflation Insights. Founder Omaia Sharif argued.

“If Fed officials are reeling from the May rate hike, wages data will likely push them to support at least one more rate hike,” it wrote in a note to clients.

Wage growth is a sensitive issue for the Fed. Accelerating wage growth is helping workers, especially those at the bottom of the income ladder, to keep up with rapidly rising prices. And most economists inside and outside the Fed say wage growth is not the main reason for the recent high inflation.

But Fed officials worry that if companies need to keep raising wages, they will also need to keep raising prices. So even if the pandemic-era turmoil that caused inflation to rise recedes, it could make it harder for the central bank to return to its 2% annual inflation target.

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