What to watch on the work day: Can wage growth normalize without substantially higher unemployment?

On Friday, the Bureau of Labor Statistics (BLS) will release its monthly report on the state of the labor market. In addition to employment growth in high-level wages and changes in labor force participation, probably the most anticipated measure is the pace of nominal wage growth.

Despite the recent contraction in gross domestic product (GDP), the labor market has expanded at a steady pace and wage growth continues to lag behind inflation. Despite this, many continue to fear that abnormally high nominal wage growth (compared to the pre-pandemic) will prevent inflation from returning to more normal levels in the next year. In this Labor Day preview post, we take a closer look at wage growth using different measures to gauge how concerned we should be that wage growth will not normalize in the next year without aggressive policy measures that cause collateral damage (such as a higher unemployment) in the labor market. We believe most of these measures show a slowdown in wage growth over the past few quarters.

In Figure A, we report quarterly changes in earnings (expressed as an annualized rate) using five measures: average hourly earnings for all workers from current employment statistics (CES); average hourly wages for production and non-CES workers; private wages and salaries from the labor cost index (ECI); private wages and salaries, excluding paid incentives, from the ECI; and private wages and salaries from national income and product accounts divided by a measure of the aggregate hours we build. We average over quarters for CES measures, which are generally reported monthly. The data note at the end of this post gives more details on these series.

All but the ECI series show pronounced spikes in wage growth in 2020. These are the result of the well-known “composition effect” brought about by job losses which has been extremely skewed towards lower wage workers. The ECI series are “fixed weight” series which are not affected by compositional variations. Over the past few quarters, the effect of compositional changes in rising and then slowing wage growth seems to be behind us. More importantly, four of the five series show wage growth that has not only stabilized but is decelerating recently, even though the unemployment rate remains quite low. This is obviously not indicative evidence that wage growth will fully normalize to pre-pandemic trends, but it is comforting to see a deceleration even as non-wage price factors keep inflation very high and unemployment remains very low.

Quarterly wage growth shows no signs of accelerating in the first half of 2022: Annualized quarterly wage changes, alternative measures, 2018-2022

quarterly changes AHE, totally private AHE, prod / not super ECI (private wages and salaries) ECI (private, excluding paid incentive) NIPA Total wages and salaries / hours of the private sector
2018Q2 2.8% 2.8% 2.8% 2.8% 1.8%
3rd quarter 2018 3.7% 3.3% 3.7% 2.7% 4.7%
4th quarter 2018 3.6% 3.9% 2.7% 2.1% 1.3%
1st quarter 2019 3.7% 4.0% 2.7% 3.6% 9.6%
2nd quarter 2019 2.3% 2.9% 3.0% 3.3% 2.1%
3rd quarter 2019 3.6% 3.9% 3.6% 2.7% -0.2%
4th quarter 2019 3.1% 3.2% 2.6% 2.3% 5.3%
2020Q1 4.0% 4.2% 4.1% 4.4% 5.9%
2020Q2 16.3% 16.2% 1.4% 1.4% 24.8%
2020Q3 -3.0% -3.1% 2.3% 2.6% -3.8%
2020Q4 3.2% 3.4% 3.4% 2.6% 10.6%
2021Q1 4.2% 4.6% 4.8% 4.3% 0.0%
2021Q2 4.7% 6.4% 3.6% 3.9% 9.0%
3rd quarter 2021 5.7% 7.2% 6.5% 5.0% 8.2%
4th quarter 2021 6.1% 7.3% 4.7% 5.3% 10.0%
1st quarter 2022 5.2% 6.0% 5.2% 6.6% 7.7%
2022Q2 4.3% 5.4% 6.5% 5.4% 5.9%
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