Total compensation paid to US workers grew at a faster pace than expected last quarter, pointing to ongoing momentum in the job market.
The Employment Cost Index rose 1.1% in the third quarter, the Labor Department reported Tuesday. That’s a faster pace than the 1% gain registered in the second quarter.
Wage growth advanced at a healthy 1.2% pace in the July-through-September period, accelerating from the prior quarter’s 1% rise, contributing to a pickup in overall compensation growth. Benefits growth, meanwhile, was unchanged during the same period.
From a year earlier, wages and benefits grew 4.3% in the third quarter, a slower pace than the second quarter’s 4.5% annual gain and the first quarter’s 5% rate.
The figures underscore the resilience of the US job market amid the highest interest rates in 22 years — a potential headache for the Federal Reserve, which is tasked with managing inflation. Wage growth could be contributing to some upward pressure on prices, but economists debate how much worker pay gains are ultimately fueling inflation.
An analysis from jobs site ZipRecruiter showed that consumer prices rose faster than private-sector wages from the first quarter of 2020 through this year’s third quarter: Consumer prices grew 18.2%, versus compensation growth of 16%.
“The ECI data suggests that for the most part, wage growth has been slower than inflation, so it’s the tail wagging the dog, not the other way around with inflation that’s pulling up wages, not wages that are driving inflation,” Julia Pollak, ZipRecruiter chief economist, told CNN.
Pay gains also vary by industry. The ZipRecruiter analysis also showed that compensation growth for production workers advanced 21.4%, outpacing consumer prices; while for service workers, pay growth was 15.2%.
“That may be one reason why so many Americans are feeling gloomy about the economy, even though many of the top line statistics are very rosy,” Pollak said. “That’s because when you look at wage growth for a fixed group of people, it has been slower than the increase in the overall average.”
Strong labor market
Employers added 336,000 jobs in September, the strongest gain since January, while the unemployment rate held at a low 3.8% that month. New applications for unemployment benefits remain at historically low levels and job openings continue to dwarf the number of unemployed people actively seeking work by millions. Government figures on job gains, openings and the unemployment rate are due later this week.
But economists widely expect growth, including hiring, to slow in the months ahead. Higher borrowing costs, tougher lending standards from banks and the resumption of student loan repayments are all expected to help cool the economy. Furthermore, a possible government shutdown next month could sour Americans’ moods.
The Fed is also mulling one more rate hike this year, but investors are overwhelmingly betting that the central bank will hold interest rates steady at a 22-year high during its two-day policy meeting, which started on Tuesday. Investors’ bets that the Fed will pause again in December are much lower, at around 68%, according to the CME FedWatch Tool.
The expectation that the economy will weaken — after it expanded at a blistering 4.9% annualized rate in the third quarter — is giving the Fed enough room to hold rates steady this week.
Productivity data also matters
And while wage data is an important factor for the Fed when deliberating policy moves, the central bank doesn’t look at wages in isolation.
“You can’t say anything about wages until you actually know what’s happening with productivity,” Chicago Fed President Austan Goolsbee told Bloomberg a few months ago.
Wage growth can indeed be strong without stoking inflation — as long as productivity is just as strong or even stronger. US labor productivity, measured as employee output per hour, surged 3.5% in the second quarter, its biggest gain in nearly three years.
With workers remaining at their jobs for longer, Pollak of ZipRecruiter said she expects productivity to continue to expand. The Labor Department releases third-quarter productivity data later this week.
The issue with productivity data, according to economists, is that it’s highly volatile and subject to large revisions. But it’s still a critical element when assessing the impact of wage growth on inflation.
“The other thing about wages is they’re not a leading indicator of inflation. They’re backward-looking,” Goolsbee said. “If you want to know if you’re beating inflation, go watch the inflation.”
