Wages and salaries are finally beginning to rise in a meaningful way. The rate of growth is at levels not seen in about a decade, when the effects of the Great Recession began to ripple through the economy.
For the year ended in September, total compensation costs (wages and salaries plus benefits) for private industry workers rose 2.9%, significantly faster than the pace from the prior year (2.5%) according to data maintained by the US Bureau of Labor Statistics. The wages and salaries component rose 3.1% for the year, bringing a welcome addition to many household budgets and keeping modestly ahead of the 2.3% rise in consumer prices. The growth was also a notable uptick over the 2.6% observed between September 2016 and September 2017.
Growth in wages and salaries ranged from 2.1% in installation, maintenance, and repair to 4.0% in sales and related occupations. Several other categories experienced strong gains including service occupations (3.8%), transportation and materials moving (3.7%) and multiple categories in the sales and office group. Industries with particularly strong wage and salary growth clustered in transportation and warehousing, leisure and hospitality, and several categories of services.
It was only a matter of time before wages and salaries began to rise given the labor market situation. When the supply of any good or service does not keep pace with demand, upward pressure on prices is inevitable. The recovery after the Great Recession was initially characterized by slow job growth, but now that the labor market is tight, companies are bidding up wages and offering other enticements in efforts to attract and retain needed workers.
The unemployment rate has been 3.7% for a while, which is lower than what most economists would call “full employment.” Employment continues to rise, up 250,000 in October and an average of more than 210,000 per month over the past eight years. The level of job openings is at an all-time high and well above the number of unemployed, and initial claims for unemployment are at 50-year lows. We can expect continued upward movement in wages as long as that situation persists. Some industries and occupations are in particularly high demand, and compensation is rising accordingly.
While higher wages clearly benefit workers, there could be too much of a good thing if they contribute to higher inflation. For now, the increase in compensation is a long-overdue adjustment and a positive signal from the economy. One thing that people often forget is that increases in pay that are accompanied by gains in productivity are not inflationary at all. Thus, achieving higher output per worker is the ultimate and best way to assure both higher standards of living and stable prices.