Its Jobs Week - Can Wages Go Higher?
Macro Perspectives
It's jobs week.
The Fed explicitly targeted jobs early in the rate hiking cycle - they wanted a softer job market, because they feared that wage gains would add fuel to the inflation problem.
In a tight labor market, employees have leverage in negotiating higher wages, particularly in what was a hot inflation environment. The Fed feared an upward spiral in wages, where wages would feed into higher prices, which would feed into higher wages ... a self-reinforcing cycle of rising inflation.
With the above in mind, the job market has softened a bit, but remains strong. Meanwhile, wage growth has been strong. But inflation has been on a steady decline since June of last year.
Why haven't stronger wages fueled the inflation fire? Productivity.
We looked at Q3 productivity data last month - it was big, at 4.7%.Â
Yesterday morning it was just revised UP to 5.2% (annual rate) - that's five-times the rate of the decade prior to the pandemic, and more than double the long-term rate of productivity growth, on data going back to 1947.
Despite some of the hottest wage gains we've seen in decades, productivity gains are outpacing wage gains. The annual growth in the cost per unit of output last quarter was actually negative (-0.8%). Which was revised even lower in yesterday’s report.
So, wage growth is more than being offset by productivity gains, which means wages can go higher without stoking inflation - a lot higher.
Remember, Jerome Powell has said in the past that wage gains should equal productivity gains plus inflation.
The latest inflation of 3.2% plus 5.2% productivity, gives us year-over-year wage gains of 8.4%.Â
The Atlanta Fed's wage growth tracker is at just 5.2%.Â
So, we should expect bigger wage agains. And we should expect persistent wages gains. As I’ve mentioned before, we are in the early innings of generative AI, which might be the most productivity enhancing technological advancement of our lifetime. That means high productivity gains will be with us for a while.
Great insights, as always - thanks for sharing ! How do you explain the continuous gains in productivity since mid '22, even before the breakthrough of generative AI, with a peak in unit labor costs that have continuously decreased since then ? Also, looking at the long term trends isn't there a kind of normalization in productivity trends after the various wobbles induced by the pandemic ?