A major undercurrent of last year's entire economic policy debate has been this question: Is compensation for American workers spiraling upward because of a tight job market destined to fuel inflation?
- New data points decidedly toward "no."
Why it matters: If wage inflation continues to fade — admittedly, a big if — the Fed will be able to declare victory on inflation without engineering a steep economic contraction.
- It looks increasingly like the surge in worker compensation, in late 2021 and early 2022, was a one-time bump rather than the beginning of an upward wage spiral.
Driving the news: The Employment Cost Index, the gold standard of measures of worker compensation (more on why below), rose 1% in the final three months of 2022, below the 1.2% analysts had expected.
- Growth in total compensation had its recent peak in the first quarter of 2022, at 1.4%, then rose more slowly in each subsequent quarter.
- Put differently, compensation rose at a 5.8% annual rate in the first three months of 2022, and a 4% annual rate in the final three months of the year.
The intrigue: What's remarkable about the downshift is that it occurred even as the job market remained extremely tight — by some measures even tightening further over the course of 2022.
- The unemployment rate averaged 3.6% in Q4, below the 3.8% of Q1. The Phillips Curve, a linchpin of economic policy, would predict the opposite: that a lower unemployment rate would coincide with faster compensation growth.
- The breakdown of those relationships in the last year supports the idea that the 2021-22 job market is experiencing unusual disruptions emanating from the pandemic, rather than behaving in the way conventional economic models would predict.
Between the lines: The deceleration in wage growth has been seen in other measures of compensation, including average hourly earnings in the monthly jobs report and the Atlanta Fed's wage growth tracker.
- But the Fed will take extra comfort from seeing the same thing happen in ECI numbers, which captures the value of both wages and benefits, and adjusts for shifts in occupations and industries.
What they're saying: "The debate about wage growth is over: it is coming down," wrote Nick Bunker, head of economic research at the Indeed Hiring Lab.
- "The question is now when and how this descent ends," he said. "The prospect of the labor market further fueling inflation is now diminishing, something the Federal Reserve should and will consider."
