Perhaps Wage Growth Isn't Slowing After All?

The typical worker's pay jumped in May even as the number of people working continued to rise briskly. But there are a few signs of slowing in the job market.

While the latest data could end up being revised, the numbers for May imply that the apparent wage slowdown in the first few months of this year may have been a fluke. That would have implications for the inflation outlook and interest rates.

There is no such thing as a job market that is “too good” for workers, nor is there any inherent tension between high employment and tame inflation.¹ But there is a link between the job market and prices via wages. Most workers spend most of what they earn on goods and services, and any increase in pay tends to have persistent effects on spending. If consumers’ wages rise much faster than businesses’ ability to produce, prices will probably rise.² This is why investors and policymakers spend so much effort tracking the job market.

Trying to Catch the Turn

From the middle of 2022 through the end of 2023, the typical U.S. worker’s wage consistently rose about 0.4% each month (4.9% annualized), compared to a pre-pandemic average growth rate of about 0.26% (3.2% annualized). The apparent stability in monthly wage growth contrasted with the continual normalization of indicators of job market churn, such as the proportion of workers quitting their jobs for better opportunities elsewhere, or the number of posted openings.

That suggested the possibility that the underlying trend in wage growth—based on what managers believed they could afford and what most workers considered fair—had accelerated. Absent a commensurate acceleration in trend productivity growth or an offsetting increase in the household saving rate, the shift in the trend implied persistently faster underlying inflation of about 1.5 percentage points on a yearly basis.

That was not necessarily a problem—in fact, it represented a meaningful improvement over the world of 2001-2019—but it also implied a persistently higher set of interest rates than what prevailed in the decade before the pandemic.

By last month, however, it seemed that things might have changed, with wage growth in the first four months of 2024 remarkably close to the pre-pandemic average. As I noted at the time, it was possible that the normalization in job market churn had finally delivered the long-awaited slowdown in nominal pay increases.

The most recent data, for May, suggests that is not what happened. Or, at the very least, that the normalization of nominal wage growth will take a bit longer.

The typical worker’s average hourly pay jumped by 0.45% in May relative to April on a seasonally-adjusted basis. Since the end of 2022, the only other months with larger pay increases were March 2023, July 2023, and January 2024. At the same time, wage growth for March 2024 was revised up. As result, the average monthly pay increase in 2024 has ticked up from 0.29% (as of last month’s data) to 0.34%, or from 3.6% a year to 4.1%.