What to watch on jobs day: Can wage growth normalize without substantially higher unemployment?

On Friday, the Bureau of Labor Statistics (BLS) will release its monthly report on the state of the labor market. In addition to top-line payroll employment growth and changes in labor force participation, probably the most anticipated measure is the pace of nominal wage growth.

Even with the recent contraction in gross domestic product (GDP), the labor market has been expanding at a steady rate and wage growth continues to fall short of inflation. Despite this, many remain worried that abnormally high nominal wage growth (relative to pre-pandemic) will prevent inflation from returning to more-normal levels in the year ahead. In this jobs day preview post, we take a closer look at wage growth using several different measures to gauge just how worried we should be that wage growth will not normalize in the coming year without aggressive policy measures that cause collateral damage (like higher unemployment) in the labor market. We find that most of these measures show decelerating wage growth in very recent quarters.

In Figure A, we report quarterly changes in wages (expressed as an annualized rate) using five measures: average hourly earnings for all workers from the Current Employment Statistics (CES); average hourly earnings for production and nonsupervisory workers from the CES; private wages and salaries from the employment cost index (ECI); private wages and salaries, excluding incentive paid, from the ECI; and private wages and salaries from the National Income and Product Accounts divided by a measure of aggregate hours that we construct. We average over quarters for CES measures, which are generally reported monthly. The data note at the end of this post provides more details on these series.

All series except the ECI ones show pronounced spikes in wage growth in 2020. These are the result of the well-known “composition effect” driven by job loss that was extremely skewed towards lower-wage workers. The ECI series are “fixed-weight” series that are not affected by compositional changes. In recent quarters, the effect of compositional changes in raising and then slowing wage growth seems well behind us. More importantly, four of the five series are showing wage growth that has not only plateaued but is decelerating recently, even as the unemployment rate remains quite low. This is obviously not dispositive evidence that wage growth will completely normalize to pre-pandemic trends, but it is comforting to see deceleration even as non-wage price drivers are keeping inflation very high and unemployment remains very low.

Quarterly wage growth shows no sign of accelerating in the first half of 2022: Annualized quarterly wage changes, alternative measures, 2018–2022

quarterly changes AHE, total private AHE, prod/nonsuper ECI (private wages and salaries) ECI (private, excluding incentive paid) NIPA Wages and salaries/private-sector aggregate hours
2018Q2 2.8% 2.8% 2.8% 2.8% 1.8%
2018Q3 3.7% 3.3% 3.7% 2.7% 4.7%
2018Q4 3.6% 3.9% 2.7% 2.1% 1.3%
2019Q1 3.7% 4.0% 2.7% 3.6% 9.6%
2019Q2 2.3% 2.9% 3.0% 3.3% 2.1%
2019Q3 3.6% 3.9% 3.6% 2.7% -0.2%
2019Q4 3.1% 3.2% 2.6% 2.3% 5.3%
2020Q1 4.0% 4.2% 4.1% 4.4% 5.9%
2020Q2 16.3% 16.2% 1.4% 1.4% 24.8%
2020Q3 -3.0% -3.1% 2.3% 2.6% -3.8%
2020Q4 3.2% 3.4% 3.4% 2.6% 10.6%
2021Q1 4.2% 4.6% 4.8% 4.3% 0.0%
2021Q2 4.7% 6.4% 3.6% 3.9% 9.0%
2021Q3 5.7% 7.2% 6.5% 5.0% 8.2%
2021Q4 6.1% 7.3% 4.7% 5.3% 10.0%
2022Q1 5.2% 6.0% 5.2% 6.6% 7.7%
2022Q2 4.3% 5.4% 6.5% 5.4% 5.9%
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