Wage Inflation Still Elevated Unless you “Keep it Real”

BLS Data

The Bureau of Labor Statistics released their Economic Situation for May 2023 today. The headline of this report is generally the change in the number of jobs, but we thought it interesting to investigate how the wages of jobs in various industries changed in the last year compared to 2019, the total change in wages since 2020, and what these same metrics look like when adjusted for inflation.

Wage Growth

The chart below depicts the growth in nominal wages year over years as of May 2023, the nominal change in wages in 2019, and the total nominal change in wages since January 2020. Notice the large variation in wage changes by industry. While average wages have increased 17.9% since the beginning of 2020, there is a large difference between the 9.9% increase seen in the Mining and Logging industry and the 25.3% increase in the Leisure & Hospitality Industry. Similarly, there is a large difference in wage gains in2019 and in the last year. Wages in the Utilities industry grew around 4% faster in the last year than in 2019. In aggregate, total private sector wages are growing around 1.3% higher than in 2019. Middleburg is a real estate developer so the fact that wages for Construction labor have increased by 5.1% over the last year has been a concern for both us and all real estate developers, but we hope it will attract additional workers to our projects.

Wage Price Spiral

In late 2022 economists at the Federal Reserve Bank of Richmond published an article entitled “Are Services Serving Up a Wage-Price Spiral?” in which they describe a wage price spiral as follows:

In a wage-price spiral, inflation is fed by a vicious cycle where, as the cost of living rises, workers demand higher wages to pay their bills, leading firms to increase prices even further to cover labor costs.

They found that the relationship between employment cost increases and consumer price increases for services increased since 2020 in comparison to the 2000 to 2019 period. This suggests that the higher wage growth rates in service industries will likely contribute to future service consumer price indices. this relationship does not appear to exist in the goods industry, but the authors point out that services make up 84% of private-sector nonfarm payrolls so it is imperative that Federal Reserve policy makers get both inflation and wage growth back to levels consistent with their price stability mandate.

Keeping Wages Real

The wage increase story is much changed when one considers the difference in real wage increases in 2019 and currently. In aggregate, real wages increased by 0.6% during 2019 but declined by the same amount over the past 12 months. The total change in real wages since the beginning of 2020 has been only 0.3%, but as with nominal wage changes, there are the same winning and losing industries. The Leisure & Hospitality industry was a real wage increase of 6.6% while Mining & Logging industry was a real wage decrease of 6.5%.

Getting Back to 2%

The increased inflation we have seen over the past year has eroded workers’ real wages by 0.6% compared with the real wage gain of the same amount in 2019. Further, the total real change in wages seen since the beginning of 2020 has been less than 0.1% annually, 0.5% less than in 2019. The Federal Reserve has increased interest rates by 5% in the past year to quell inflation yet nominal wage increases are still significantly higher than they were in 2019. The sooner the Federal Reserve gets inflation back to its 2% target, the sooner we may return to real wage increases for workers.