Wages among hourly workers in the United States rose above expectations in January, putting economists on alert for the stirrings of a possible wage-price spiral as concerns about the persistence of underlying inflationary pressures shift from supply-side bottlenecks to worker demands for higher pay.
Average hourly earnings of all private-sector employees rose by 23 cents to $31.63 in January, or an over-the-year increase of 5.7 percent, according to the Labor Department’s latest jobs report (pdf).
The 5.7 percent annual wage bump is the highest on record with the exception of a sharp, one-month increase in wages in April 2020. That’s when millions of relatively low-paid workers lost their jobs while their relatively high-paid counterparts remained employed, with the structural shift in employment composition leading to a boost in average wages.
Surging inflation, which in the year through December hit a 39-year high of 7 percent, has more than erased all the wage gains, however, putting earnings into negative territory in real terms and eroding the purchasing power of many American households.
Still, while inflation has so far had more to do with pandemic dislocations than with rising labor costs, concerns are stirring among economists that this dynamic could change.
“If there had been big job losses, one might have blamed composition effects. That employment grew strongly both overall and in low-wage industries says that wage growth really is gaining momentum,” Justin Wolfers, economics professor at Michigan University, wrote in a tweet.
“Tough day for Fed doves: Payrolls growth was strong, revisions suggest real momentum, unemployment remains low, and wage growth appears to be taking off,” Wolfers added, referring to the expectation that the strong employment report—which showed U.S. employers adding 467,000 jobs in January versus forecasts of 125,000—would put pressure on the Fed to continue tightening its loose monetary settings.
It’s a sentiment shared by ING Chief International Economist James Knightley, who wrote in a note that wage pressures continue to build, giving more ammunition for Fed hawks to “push hard.”
“The narrative of intensifying labour market inflation pressures and strong employment growth when Omicron is supposedly depressing activity only makes it more likely that the Fed will embark on an aggressive series of interest rate increases,” Knightley wrote, predicting that the U.S. central bank would hike rates five times in 2022, starting in March.
A sign that central bankers are becoming more alarmed at wage-related inflationary pressures were remarks on Friday by top officials at Britain’s central bank, which just raised rates again to head off inflation running at a 30-year high.
Bank of England governor Andrew Bailey told BBC radio in an interview that rising wage pressure threatened the central bank’s ability to keep a grip on inflation.
“I’m not saying nobody gets a pay rise, don’t get me wrong, but I think, what I am saying, is we do need to see restraint in pay bargaining otherwise it will get out of control,” Bailey said.
“We are looking, I think, to see quite clear restraint in the bargaining process because otherwise, as I say, it will get out of control,” he added. “It’s not at the moment, but it will do.”
The cost of hiring new employees and retaining existing ones rose in 2021 at its fastest pace in 20 years, according to earlier Labor Department figures, providing yet another data point on the pressures underpinning the current inflationary spell.
Rising labor costs have prompted a number of economists to warn of a possible wage-price spiral, a kind of negative feedback loop where inflation expectations become more entrenched, prompting workers to demand higher wages, in turn putting more upward pressure on prices.
“It confirms that the risk of a wage-price spiral is now real with low-income families asking for higher salaries,” Christophe Barraud, chief economist and strategist at Market Securities, said in a tweet commenting on Friday’s jobs report.
The Labor Department data showed that the wages of lower income earners, as reflected in the average hourly earnings for production and nonsupervisory workers in the private sector, rose at an even faster pace of 6.9 percent in the 12 months through January. Like the 5.7 percent pace of rising wages among all private-sector employees, this was the highest since April 2020.
While most economists expect inflationary pressures to moderate over the coming year or so, a big question remains over whether upwards wage pressure will moderate or stay elevated and put a floor under how much inflation can cool.