Wages grew rapidly during the year to March, and unemployment fell markedly last month, indicating a hot labor market that could keep pressure on the Federal Reserve as it predicts how much and how quickly the economy will cool.
The central bank is trying to slow demand to a more stable pace at a time when inflation is at its fastest pace in 40 years. Fed officials began raising interest rates in March and suggested they could raise rates by half a percentage point in May – twice as much as usual. Making money more expensive to borrow and spend can slow down consumption and end up hiring, tempering wage and price growth.
Friday’s employment report can back it up by at least half a point.
Wages have risen 5.6 percent over the past year, the report shows, at a much faster rate than annual wage growth of 2-3 percent, which was typical in the 2010s. At the same time, the unemployment rate fell to 3.6 percent in March from 3.8 percent in February. Unemployment is now just above the half-century low it reached before the pandemic.
“The number of salaries a year ago continues to be very high; it seems to put an end to any debate over whether the unemployment rate is a clear and reliable signal of the labor market, ”said Michael Feroli, chief economist at JP Morgan. “The labor market is tense.”
While a strong labor market has given politicians confidence that they can slow the economy somewhat without causing a recession, a rapid rise in wages could also continue to raise prices, helping to sustain consumer demand and pushing companies to raise prices as they try to cover more high labor costs. .
“The promise of higher wages is a great thing,” said Fed Chairman Jerome H. Powell after the central bank’s decision to raise interest rates last month. But the increase “takes place at levels well above what would correspond to 2 percent inflation – our goal – over time.”
The state of jobs in the United States
Vacancies and the number of workers who voluntarily leave their positions in the United States in March remained close to a record high.
The March Employment Report shows that wages are growing at an even faster annual rate than when Mr Powell made his remark.
Investors had already expected a half-point increase in May, but after the report came out on Friday, markets became more determined in that forecast. The chances for a big increase in interest rates at the June meeting of the central bank also increased.
Wages are rising rapidly as employers compete for a limited number of employees. There are about 1.8 vacancies for each unemployed person, and companies complain that it is difficult for them to hire in different fields and skills.
Over the past year, wages have increased the most for workers in the leisure and hospitality industry, up 14.9 percent, and workers in transportation and warehousing companies have also received double-digit wage increases. These figures are for employees who are not executives.
Last month, wages in leisure and hospitality rose significantly again, while wages also rose sharply for workers in the financial industry and durable goods.
Some economists have embraced the fact that monthly wage growth, while still rapid, this year seems to have slowed somewhat compared to the highs they affected last year. But some have noted that the current pace after a year of rapid growth and combined with prolonged labor constraints is probably enough to keep the Fed on high alert.
“If it stays so tight, the spiral of wages and prices will only accelerate,” Mr Feroli said. On the Fed, he said: “I think they probably think it’s unsustainable.”
Rapid wage growth is a boon for many workers, although families find that their wages, although higher, no longer buy as much as prices rise. Wage growth is not quite keeping up with inflation for many workers.
Despite this, President Biden spoke of rapid progress in the labor market and wage growth as a positive for the economy and a “statement about the type of economy we are fighting for” in defining policy.
“After decades of ill-treatment and too little pay, more and more American workers now have real strength to earn better wages,” Mr Biden said. “Some see this as a problem – we have had such a discussion in the past. I don’t. I think it is long overdue. “
But the White House is also worried about inflation. The Biden administration is releasing oil from strategic reserves to try to bring down gas prices. The government is also going to allow slightly more seasonal workers from overseas to come to the United States this summer to reduce labor shortages.
Hot demand is not the only factor in rapid inflation – prices have also risen because supply chains have lagged behind at the start of the pandemic and are struggling to revive. But the fact that people want to buy furniture, clothing and restaurant food helps keep inflation going.
As the economy adds higher-paying jobs, many households earn more money than otherwise. This could keep consumer demand strong even as the Fed starts raising interest rates.
“It’s a great spending ability to fight,” said Diane Swank, chief economist at Grant Thornton. “The job market is a very significant part of the overall story.”
Gene Lee, chief executive of Darden Restaurants, said during a March 24 earnings call that he expects consumers to be able to continue eating even if government incentives related to the pandemic have disappeared and if gas prices have risen, cutting home budgets . Darden brands include Olive Garden, LongHorn Steakhouse and Yard House.
While the restaurant chain raised prices by 6 percent in the last quarter of fiscal year 2021 from a year earlier, wages at the bottom of the revenue spectrum grew more than that.
“We believe that wage inflation across the country is growing quite rapidly,” Mr Lee said. “And that’s why we believe the consumer can handle it right now.”