Is the U.S. Job Market Disinflationary Now?
Employment is rising as workers rejoin the labor force, while pay growth now looks to be slowing thanks to revisions. But other indicators suggest that job churn has changed little since the summer.
Federal Reserve officials want to weaken workers’ ability to secure wage increases—and have made it clear that they will push the U.S. economy into a downturn to do so, if necessary. Their fear is that inflation will continue to run too fast to be consistent with their inflation goal unless they do something to force the yearly growth rate of nominal income to slow by several percentage points.1
But what if that were unnecessary? To the extent that wages have risen because workers have moved to better jobs, the extra income should not be inflationary because the additional spending power would be commensurate with the additional value being generated.
And if wages were rising unusually quickly as a consequence of the disruptions caused by the pandemic and, to a lesser extent, Russia’s most recent invasion of Ukraine, then income growth should decelerate on its own as the public health situation and the economy (eventually) normalize. In that case, there would be no need for policymakers to squeeze business conditions until blameless workers lost their jobs.
Optimists—including me—have been hoping for this outcome for a while, but the data since last summer had been dashing those hopes. Even though the public health situation has more or less been fixed and even though many commodity prices have returned to their pre-invasion levels, job market churn remains elevated while production remains depressed relative to employment and pay.2
The latest data on labor income, however, suggest that things may be improving, with wages decelerating even as employment rises thanks to an expanding labor force.
It is rare that one month can make such a difference to in this sort of analysis, but the past few months have been extremely unusual in terms of the magnitude of the revisions to data that have already been released.