Pay increases are slowing down, but that might be good thing, experts say. Here’s why
June was a good month for the job market. The U.S. added 372,000 jobs, and the unemployment rate held steady at 3.6% — just above the pre-pandemic rate in February 2020.
One of the most critical indicators in the jobs report was nominal wage growth. During the 12-month period ending in June 2022, wages grew 5.1%, slowing slightly from May’s report, which showed a 5.3% growth rate. Ahead of the report, some experts warned that wage growth was the key economic indicator in determining the Federal Reserve’s next steps as it attempts to control rising prices.
But, with inflation still through the roof, should the average person be worried that wage growth is slowing down?
What is nominal wage growth?
Nominal wage growth is how much your salary increases before it’s adjusted for inflation.
The Economic Policy Institute, a nonprofit think tank that researches economic trends and policies, identifies nominal wage growth as “a crucial measure of how far from full recovery the economy remains.”
In “normal” times, namely not amid a years-long global public health crisis, nominal wage growth should sit at about 3.5-4%, according to the EPI.
Employers can use wages as an incentive for employees. When a lot of people are looking for jobs, employers do not need to incentivize labor. On the other hand, when the labor market goes into a period such as the COVID pandemic’s “Great Resignation,” employers often have to work to get employees to enter the labor market by offering better-than-usual incentives.
Wages during the pandemic
Before the pandemic, nominal wage growth in the U.S. was trending low and without much change since about 2009, according to the EPI. Employers did not need offer big salary increases to get and retain employees.
The pandemic has changed this trend for a few reasons.
When the pandemic started in spring 2020, many low-wage workers lost their jobs while higher-earning workers remained employed. This disparity created a false sense of skyrocketing wage growth as the average wage aligned with those higher-earning workers’ salaries. As economic recovery has unfolded and low-wage workers have reentered the workforce, wages have normalized.
The pandemic created other irregularities, too.
Over the past few years, volatile turnover has gripped the labor market as millions of Americans left their jobs. “The Great Resignation” left employers with vacant positions and a scarcity of workers. This had big impacts for businesses and consumers, such as longer wait times in the service industry and shipping delays.
In an attempt to lure workers, employers started raising wages. Not only do higher wages serve as incentive, but they also were necessary to compete with rising prices. Workers needed more income to keep up with the inflationary pressure making everything more expensive.
Is slower wage growth bad?
Nominal wage growth is slowing down after peaking at 8% in April 2020. This means that workers are going to see their salaries increase less, or at a slower rate, than over the last few months.
Meanwhile, inflation is still putting pressure on the average consumer’s wallet as higher prices are limiting spending power.
Slowing wage growth might not be such a bad thing, though.
It is difficult for employer’s to keep up with increasing wages when worker output is not growing at the same pace, Jason Furman, senior fellow at the Peterson Institute for International Economics, told McClatchy News.
“Employers can afford about 1% nominal wage growth without raising prices because of increased worker productivity, so if everyone on average is getting a 6% raise, employers are probably going to be raising prices by about 5% a year,” Furman said.
While this change in prices might not show up immediately, higher prices are an inevitable outcome when nominal wage growth is rapidly increasing. When the Fed sees high nominal wage growth, it often makes lower inflation seem impossible, Furman said.
Basically, everything needs to come in moderation. Wages should grow, but only enough that employers can keep prices stable and afford to pay their workers.
What now?
Two plus years into the pandemic, the Fed is working hard to aid the economic recovery.
Last month, it raised rates in an attempt to slow inflation and manage rising prices. Now, the Fed is relying on data from June to inform its next move, and nominal wage growth might play a big role in upcoming policy decisions.
In the United States’ current situation, it doesn’t seem as if wages have been the cause of inflation yet. Instead, other factors that have shocked the system can be credited with pushing prices up. Slowing nominal wage growth might be a good indicator that a full recovery is on the horizon, Josh Bivens, EPI’s director of research, told McClatchy News.
“I think it is short-run okay news that nominal wage growth is decelerating. It means one of the forces that could be pushing up inflation isn’t,” Bivens said. “It’s actually starting to get back to normal, so it’s one less inflationary force you have to worry about.”
Unfortunately, the bad news is that the road to recovery might mean workers’ paychecks suffer for a bit, said Bivens, who remains hopeful that the coming months will provide reprieve as prices continue to fall.
Big picture: The economy seems as though it’s on the right path. Slowing nominal wage growth might hurt the average American in the short run, but it gives the Fed a good sign that it might not need to raise rates any more just yet.
“It’s really unsatisfying. It’s kind of like let’s just be patient and wait this out because the policy actions we can take to reduce inflation ... will cause more damage than actual inflation,” Bivens said. “To me, keep wage growth about where it is now, don’t weaken the labor market, and then just wait for those economic shocks to start relenting.”
The June 2022 Consumer Price Index report, which contains inflation data, will be released Wednesday, July 13, and will give economists and the Fed greater insight into the state of the economy’s recovery.
This story was originally published July 12, 2022 at 11:26 AM with the headline "Pay increases are slowing down, but that might be good thing, experts say. Here’s why."
