New wage and labor market data released on Friday support what Federal Reserve officials hope and suspect: that rising worker compensation and labor supply are helping the U.S. economy grow modestly without igniting inflation.
Last month, wages rose 4% annually, continuing a modest fall but still over the 3% level regulators consider consistent with their 2% inflation target.
After a recent increase in worker productivity and a moderation in the average number of hours worked by each employee, labor costs for each unit of output fell in the third quarter, muting wage growth as a reason for companies to raise prices while giving workers more money to spend.
Fed and other economists have also noted improved labor supply, with half a million more people working or searching for work last month, as a method to boost output without raising prices by firms bidding up pay for a smaller pool of workers.
Last week, Fed Chair Jerome Powell told Spelman College that growing earnings had boosted consumer demand while pandemic-era savings ran out. "As long as unemployment remains low...and wages are moving up above inflation, there's no reason why spending wouldn't continue to hold up," said Powell.
The unemployment rate declined to 3.7% from 3.9% in October, but average hourly earnings rose 4%, contrasting with 3.2% annual consumer price increases.
The Atlanta Fed estimates that as of October, persons who shifted employment were still receiving 6.6% salary gains, much above the 4% recorded before the epidemic and a possible concern even though the rate of job switching has fallen.
Apollo Global Management chief economist Torsten Slok estimated that wage growth was "sticky" and between 4% and 5%, leading Fed officials to conclude "that a higher unemployment rate is needed to get wage inflation down to levels consistent with the Fed’s 2% inflation target." Whether Powell believes that will be obvious after next week's meeting and press conference. After the Fed's recent two-day session, he said salaries are rising sufficiently to support spending and economic growth, even while other economic factors enable inflation to decline.
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