Wages rose at a rapid pace over the year through March and the unemployment rate fell sharply over the past month, signs of a hot labor market that could keep pressure on the Federal Reserve as it reflects on how much and how quickly the economy is cooling shall be.
The central bank is trying to rein in demand to a more sustainable pace at a moment when inflation is at its fastest in 40 years. Fed officials began raising interest rates in March and have suggested they could raise rates by half a percentage point in May – twice the usual rate. Making it more expensive to borrow and spend money can slow consumption and eventually slow labor recruitment and dampen wage and price growth.
Friday’s jobs report could bolster the case for at least a half-point hike.
The report showed that wages grew 5.6 percent last year, a much faster pace than the 2 to 3 percent annual wage increases that were typical in the 2010s. At the same time, the unemployment rate fell from 3.8 percent in February to 3.6 percent in March. Unemployment is now just above pre-pandemic lows half a century ago.
“Last year’s payroll continues to be very strong; It kind of ends any debate about whether the unemployment rate is a reliable signal about the job market,” said Michael Feroli, chief US economist at JP Morgan. “The labor market is tight”
While the strong labor market has given policymakers confidence that they can slow down the economy somewhat without triggering a recession, rapid wage gains could also sustain price increases by helping to sustain consumer demand and spur firms to raise prices, as they try to cover the higher labor costs.
“The promise of rising wages is a great thing,” Fed Chair Jerome H. Powell said after the central bank’s decision to raise interest rates last month. But the hikes are “running at levels well above what would be consistent with 2 percent inflation – our target – over time.”
The state of jobs in the United States
Job openings and the number of workers leaving their jobs voluntarily in the United States remained near record levels in March.
The March jobs report showed that wages are growing at an even faster rate each year than at the time Mr. Powell made his comment.
Investors had been expecting a half-point rise back in May, but after the report was released on Friday, markets became more determined on that forecast. The likelihood of a large rate hike at the central bank meeting in June also increased.
Wages are rising rapidly as employers compete for a limited pool of workers. There are about 1.8 job vacancies for every unemployed person, and firms complain of difficulties recruiting workers across a range of skill levels and industries.
Over the past year, wages have increased by 14.9 percent, primarily for workers in the leisure and hospitality sectors, and workers in transport and warehousing have also seen double-digit wage increases. These figures refer to employees who are not supervisors.
Wages in the leisure and hospitality sectors rose significantly again last month, while wages also rose sharply for workers in the financial and durable goods industries.
Some economists have taken heart from the fact that monthly wage increases, while still rapid, appear to have slowed somewhat this year from the high rates they reached last year. But several pointed out that after a year of rapid gains and coupled with ongoing labor restrictions, the current pace is likely enough to keep the Fed on high alert.
“If things stay this tight, a wage-price spiral will accelerate from here,” Feroli said. Of the Fed, he said, “I think they probably think it’s unsustainable.”
Rapid wage growth is a boon for many workers, although families are finding that while their paychecks are higher, they’re not buying as much as prices rise. Wage increases are not quite keeping pace with inflation for many workers.
Despite this, President Biden spoke of the rapid advances in the job market and wage increases as positive for the economy and “a statement of the kind of economy we fought for” while setting policy.
“After decades of abuse and underpayment, increasing numbers of American workers now have real power to get better wages,” Biden said. “Some people see a problem with that – we’ve had this discussion in the past. Not me. I see it as long overdue.”
But the White House is also worried about inflation. The Biden administration is releasing oil from strategic reserves to try to lower gas prices. The government will also allow a slightly larger number of seasonal workers from abroad into the United States this summer to help alleviate labor shortages.
High demand isn’t the only driver of rapid inflation – prices have also risen as supply chains fell behind and struggled to recover early in the pandemic. But the fact that people want to buy furniture, clothes and restaurant food is helping inflation keep rising.
As the economy adds higher-wage jobs, many households are being paid more than they would otherwise have. That could keep consumer demand strong even if the Fed starts raising interest rates.
“That’s a lot of purchasing power to fight,” said Diane Swonk, chief economist at Grant Thornton. “The labor market is a very important part of the overall story.”
Gene Lee, chief executive officer of Darden Restaurants, said during an earnings call on March 24 that he expects consumers to continue to be able to eat out even as pandemic-related government stimulus fades from view and gas prices rise and stretch household budgets. Darden’s brands include Olive Garden, LongHorn Steakhouse and Yard House.
While the restaurant chain raised prices 6 percent year over year in the final quarter of its fiscal 2021, wages at the lower end of the income spectrum rose even more.
“We think wage inflation is picking up fairly quickly across the country,” Mr Lee said. “And that’s why we think the consumer can process that now.”
https://www.nytimes.com/2022/04/01/business/economy/jobs-fed-wages.html Rising wages are good news for workers, but keep the pressure on the Fed