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Economic Outlook - March 2019


Michael Mandel
Stepping in for Alan Blinder (who is currently on hiatus) in this issue of Viewpoints is Dr. Michael Mandel. Dr. Mandel is chief economic strategist at the Progressive Policy Institute in Washington DC and senior fellow at the Mack Institute of Innovation Management at the Wharton School (University of Pennsylvania). He was chief economist at BusinessWeek prior to its purchase by Bloomberg. He regularly writes about digital manufacturing for Forbes.com. His essentials-level economics textbook from McGraw-Hill, Economics: “The Basics”, is in its third edition and widely used across the country.

The wage inflation puzzle may finally be over. After a period of surprisingly low unemployment combined with meager wage gains, the latest figures from the Bureau of Labor Statistics (BLS) show a moderate but widespread pickup of real wages. Moreover, demand for workers appears to be intensifying, suggesting we may be seeing the beginning of the long-expected wage acceleration, with important implications for the Federal Reserve, inflation, and interest rates.

Let’s start with the state of the labor market. The unemployment rate, of course, has been below 5% since 2016. Perhaps more important, newly revised data from the BLS has significantly boosted the estimated number of available job openings. The figures now show private sector job openings up a startling 21% in the fourth quarter of 2018 compared to the fourth quarter of 2017. Job openings in January 2019, the most recent data point, are up 35% over January 2017.

The data on online help-wanted ads tells the same story. As tracked by Indeed.com, a leading job site, help-wanted ads in January 2019 were up roughly 14% compared to a year earlier. Companies need workers, and it looks like they are finally willing to pay to get what they want.

The latest data shows real hourly wages in the private sector are up a moderate 1.6% over the past year. But that’s still an improvement compared to a 0.5% growth rate a year earlier (all real wage figures are based on 3-month moving averages). Most of the gains came in the last few months of 2018 and the beginning of 2019, so they are relatively recent. The wage acceleration is showing up in some interesting places. For example, real hourly wages of workers building power and communications systems are up 10% over the past year (on a three-month moving average basis), compared to a 1.9% growth rate the year before. This reflects the need for skilled workers to help build out 5G systems around the country.

Another surprising source of wage gains: Retail. Real hourly wages for production and nonsupervisory workers in retail are up 3.3% over the past year, to their highest level since 2004. In response to the challenge from ecommerce, many brick-and-mortar retailers seem to be upgrading their workforce to provide better service to shoppers. At the same time, real hourly wages in trucking have surged to the highest level since 2000, the result of the need for more goods to be moved around the country.

Of course, the wage gains are not uniform. Real wages are falling in food manufacturing and are down in the chemical industry as well. Moreover, the current wage surge could sputter out, as a similar one did in 2016.

But if the wage surge continues, Chairman Powell and the FOMC will find themselves in a tricky position. The core inflation rate is showing no convincing signs of acceleration, still stuck in a relatively narrow band around 2 percent. Moreover, the price of imported nonfuel goods is falling as well, putting downward pressure on inflation.

If the Fed waits too long to raise rates, it risks a resurgence of inflation above target levels. But if the FOMC moves too aggressively to raise rates, a slowing economy might squelch a much-needed improvement in real wages.

Given the strength of labor demand, the balance of risks probably falls on the side of higher inflation. But the Fed may be tempted to wait a bit longer to see if the wage surge persists.