Wage Growth When Inflation Is High San Francisco Fed

This article discusses wage developments and the main factors that have influenced them since the start of the pandemic. First, it reviews developments in a broad range of wage measures for the euro area since the start of the pandemic and discusses their usefulness as signals of wage pressures. It also proposes approaches to adjust for the impact of job retention schemes on the growth in compensation per employee (CPE growth) and compensation per hour (CPH growth). Second, the article looks at how wage developments have differed across sectors, reflecting the heterogeneous impact of the pandemic shock. Finally, it discusses the impact of inflation on wage growth in the euro area by examining developments in consumer and producer wages for the economy as a whole and in its main sectors. The Wage Growth Tracker bases its results on the median, or middle, observation in the distribution of percent wage changes for a sample of individuals linked between the current month and the same month a year earlier.

Second, the figure highlights the dramatic spike in unemployment at the onset of the pandemic and the swift and unprecedented recovery that followed. Third, and perhaps most important, wage inflation has visibly picked up since the middle of last year, roughly coinciding with the pickup in inflation in Figure 1. The labour market has tightened a lot more in the United States than in the euro area, in part reflecting the more advanced phase of the US business cycle. In the short run, the indicator varies in response to economic activity over the business cycle. Over the longer run, it tends to be lower in the euro area than in the United States, reflecting the latter’s more dynamic labour market but also differences in the recording of open positions. Recent data suggest that the gap in labour market tightness between the euro area and the United States has increased compared with before the pandemic.

Wages are above their pre-pandemic levels primarily in those services sectors that have recently seen serious labour shortages. We adjust our formulation to allow countries to have different rates of average wage growth to reflect differences in their labor markets. We also account for business cycle effects, the pandemic, and the war in Ukraine to the extent that all countries responded in a similar way to these events. We end up with a combination of factors we described in the previous section, and a group of “other” minor factors. The chart makes clear that the impact on the Wage Growth Tracker under the current proposed method for rounding is much smaller than the original proposal.

1. However, because many countries experienced the pandemic and faced similar economic consequences, we can take advantage of international experiences to bolster our empirical analysis.
2. The distribution of individual wage growth is broadly similar to that shown on the Federal Reserve Bank of San Francisco website, although the methodology underlying the construction of the individual wage growth distribution differs somewhat.
3. The 90% confidence band (blue shading) suggests that these effects barely change over time and are virtually indistinguishable from zero.

In the euro area, the recent increase in labour market tightness is dampened by a larger supply of labour than before the pandemic. Labour market tightness in the United States is broad-based across industries, but can be attributed in large part to the delay in reincorporating workers in certain industries, particularly leisure and hospitality. As a simple counterfactual, if the rate of inflation had stayed at its 2019 average level of 1.8 percent, then close to 63 percent of people would have had positive real nominal wage growth in 2022. That is, a tight labor market without high inflation would have resulted in a 6 percentage point gain in the share of workers experiencing real wage growth relative to 2019, rather than a 12 percent decline.

In contrast, the red line represents the estimated effects of inflation expectations since the pandemic, which starts at 1, representing the 100% pass-through that we reported earlier. The 90% confidence band (red shading) also shows that the effects remain statistically significant for some time afterward. The results suggest that inflation expectations are playing a more important role, and this stronger role is felt over several periods. Our goal is to document how the wage Phillips curve has behaved since the pandemic to better understand its dynamics and the role that wage growth may play in how quickly inflation returns to more normal levels.

Month Moving Average of Unweighted Median Hourly Wage Growth: Job Movement: Job Stayer

A shortcoming of investigating new phenomena in real time is that not enough data are available for robust statistical results. However, because many countries experienced the pandemic and faced similar economic consequences, we can take advantage of international experiences to bolster our empirical analysis. Figure 1 displays headline consumer price index (CPI) inflation (blue line) and household expectations for inflation 1 year ahead (red line) and 5-10 years ahead (green line) from the Surveys of Consumers conducted by the University of Michigan. The figure highlights the dramatic increase in prices over the past year and how expectations for short-term inflation have ticked up in response, despite the relative stability of long-term expectations. WASHINGTON — Pay and benefits for America’s workers grew in the final three months of last year at the slowest pace in two and a half years, a trend that could affect the Federal Reserve’s decision about when to begin cutting interest rates. Compensation as measured by the government’s Employment Cost Index rose 0.9% in the October-December quarter, down from a 1.1% increase in the previous quarter, the Labor Department said Wednesday.

In the United States, wage pressures were initially only present in those sectors that were more exposed to the pandemic, notably leisure and hospitality. In the first half of 2022 the more gradual growth of nominal wages in the euro area led to a stronger decline in real wages compared with the United States. In the second quarter of 2022 the real annual growth rate of the US employment cost index was -3.3%, while for negotiated wages in the euro area it was -5.2% (Chart C, panel b).

A sectoral perspective on wage growth developments in the euro area since the start of the pandemic

That is, we average the current month median wage growth with the medians for the prior two months. The chart below shows the unsmoothed and three-month average versions of the median wage growth series. Since the pandemic, wages on average have grown at a historically rapid pace, before adjusting for inflation. Yet hiring has moderated in recent months, to levels closer to those that prevailed before the pandemic. Yet hiring has moderated in recent months, to levels closer those that prevailed before the pandemic.

At the same time consumer confidence in the euro area dropped abruptly following the invasion and uncertainty about the economic outlook rose. The combination of these factors has made assessing underlying wage pressures and the outlook for wage growth extremely challenging. Issues related to the statistical treatment of government support in the context of job retention schemes add to these difficulties. Compensation per employee declined strongly during the pandemic, heavily affected by job retention schemes (Chart 2).

Month Moving Average of Unweighted Median Hourly Wage Growth: Wage Distribution: 1st to 50th Wage Percentile

Compared with the same quarter a year earlier, compensation growth slowed to 4.2% from 4.3%. WASHINGTON (AP) — Pay and benefits for America’s workers grew in the final three months of last year at the slowest pace in two and a half years, a trend that could affect the Federal Reserve’s decision about when to begin cutting interest rates. Other recent data appears to encourage faith in inflation’s further decline this year along with worries about the labor market, including a string of strong productivity data and reports of rising layoffs. Some Wall Street https://adprun.net/ analysts that had held on to their forecasts for a March rate cut abandoned those Friday in favor of May or June. Traders of rate-future contracts are now pricing in an 80% chance the Fed will leave rates on hold next month but begin a series of five quarter-point rate cuts at their April 30-May 1 meeting. “We wouldn’t want to make much of any one month, but the continued strength of the labor market, if that continues, would lessen my worry that the job market side of our mandate is deteriorating,” Goolsbee told the Wall Street Journal in an interview.

In contact-intensive services, hourly wages closely followed the developments in containment and social distancing measures, which caused strong volatility through both hours worked per employee and statistical distortions. By contrast, in non-contact-intensive services sectors such as information and communication, hourly wage growth was less volatile (Chart 9). When comparing the latest data observation for these indicators with their wage growth tracker pre-pandemic level, the heterogeneity within contact-intensive services is much greater than within non-contact-intensive services. This reflects the recent strong pick-up in hourly wages in those services sectors where tourism plays a larger role, such as accommodation and food services, transport and trade. This is probably due to the labour shortages experienced in some of these subsectors following the reopening of the economy.

Month Moving Average of Unweighted Median Hourly Wage Growth: Industry: Finance and Business Services

Here at the Atlanta Fed, we use data from the CPS PUF to construct the Wage Growth Tracker, and one of the planned changes will significantly affect the tracker. Specifically, a person’s usual weekly or usual hourly earnings, which are unrounded currently, will be rounded. Note that our matched dataset has a slightly greater share of older, more educated workers in professional jobs than does the sample of all wage and salary earners.

Looking at real wage developments, which take nominal wage growth and inflation into account, makes it possible to analyse changes in the purchasing power of employees and to evaluate real cost pressures for companies stemming from wages. The purchasing power of employees can be monitored by looking at real consumer wage developments, which are obtained by taking the difference between nominal wage growth and HICP inflation. It is a cost factor rather than an income item, so the calculation requires a different deflator. Real producer wages can be derived by adjusting the nominal wages using value-added deflators, which measure the prices charged for the production of goods and services in the economy. Real consumer wages indicate how severe purchasing power losses have been for employees.

Estimates of underlying wage growth have, on average, remained relatively moderate since the start of the pandemic, but have started to pick up more recently. Adjusting for the effects of job retention schemes using different methods brings CPE growth quite close to its historical average over the period from the start of the pandemic to the second quarter of 2022. Among the determinants we consider in assessing wage setting is the previous rate of wage growth. This acknowledges that, in an environment with stable current inflation and inflation expectations and with the labor market in equilibrium, a previous wage contract would form a natural basis for current negotiations. Run Create_WGT_groups_usingcadre.do to create a dataset with the various groups used for different cuts of the Tracker (saved in the ‘rawdata’ folder). Then run the other two programs (in either order) to create the Tracker time series data (saved in the ‘processdata’ folder).