There was probably too much made out of the slowing in payroll employment growth in the March jobs numbers reported yesterday. This was likely driven in large part by the unusually good weather in January and February that brought a lot of spring hiring forward. However there were a couple of items that did not get the attention they deserve.
First, there is some limited evidence that wage growth is slowing. Typically the year over year change in the average hourly wage is reported. While the growth in this measure slowed slightly last month, a problem with the year over year rate is that it reflects wage growth over the last year, not just recent months. I prefer taking the annualized rate of growth for the average of the last three months compared with the average of the prior three months. This measure can be sensitive to erratic month to month changes, but at least it focuses on a more recent period, rather than telling us about the wage growth from nine or ten months ago.
Here’s the picture using this series since the start of 2013.
Source: Bureau of Labor Statistics.
As the figure shows, there was some very modest increase in the rate of wage growth in early 2016, with a peak of 3.1 percent in May of 2016. Since then, the general direction has been downward, with the rate over the last three months being less than 2.5 percent. This matters hugely for the Fed’s interest rate policy, since a main issue for those looking to raise rates is that inflation could start rising above target levels. That seems unlikely if the rate of wage growth is stable or slowing.
In this respect it is also worth noting that the Employment Cost Index (ECI), a broader measure of compensation that includes non-wage benefits like health care, shows zero evidence of acceleration over this period. Over the last twelve months the ECI has risen 2.2 percent. That is the same rate of increase as we saw in this index three years earlier.
In short, you really can’t find any evidence of accelerating wage growth in the data. The evidence of deceleration is too weak to say anything conclusive, but if anything, wage growth is going in the wrong direction to make the case for the inflation hawks.
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