Focus
September 10, 2021 | 13:22
Why Aren’t Wages Rising Faster?
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Why Aren’t Wages Rising Faster? |
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“Today we see little evidence of wage increases that might threaten excessive inflation” “Wage increases have been moderate to date” — Bank of Canada Governor Tiff Macklem, Sept. 9, 2021 Good help is hard to find these days, say more businesses. Yet, unlike prices, wages are surprisingly calm. But a shift is likely underway, one that risks sustaining the current upswing in inflation. |
In the U.S., several wage measures that do not adjust for job shifts have picked up (Chart 1). These measures need to be treated with caution given the tilt toward higher-paying jobs early in the pandemic, though a partial reversal has since occurred. Unit labour costs are rising faster than in late 2019, with the two-year annualized rate doubling to 3.0%. Although productivity growth has improved (2.2%), it’s been eclipsed by hourly compensation (5.3%). Average hourly earnings are running the fastest in nearly four decades, apart from early in the pandemic when low-paying jobs plummeted. It’s telling that earnings have sped up in most industries, including the lower-paying hospitality and retail sectors. Facing a surge of pent-up demand, many diners have struggled to find help, while large retailers have hiked minimum rates. The average reservation wage in the U.S.—the lowest pay a person is willing to accept for a new job—is up more than 5% annualized in the past two years, finds the New York Fed. Still, other wage measures that do control for occupational shifts—such as the employment cost index and the Atlanta Fed median wage tracker—show minimal acceleration (Chart 2). For the wage tracker, some upward pressure in low-skilled and low-wage jobs has been offset by steadier gains for other workers. This reflects a shift in worker preferences toward higher-paying industries that were less harmed by the pandemic, leading to shortages in some service industries that are now storming back. Not surprisingly, wages are rising faster among young workers who tend to take entry-level jobs in the hospitality industries. In Canada, wages are rising only modestly faster than before the pandemic. Fixed-weight average hourly earnings (which adjust for compositional shifts in employment) and average hourly wages (which do not) are trending above 3% on a two-year annualized basis, about one-half percentage point faster than in early 2020 (Chart 3). Average hourly wages jumped at the start of the pandemic due to increased layoffs of low-paid workers in the leisure and hospitality sector. Controlling for sectoral shifts, Statistics Canada finds that the average is running a little slower than the headline rate. Meantime, the Bank of Canada’s wage-common measure, a year-over-year gauge of underlying pressures that extracts the common trend from several wage metrics, has averaged 3.2% in the past year to 2021Q2 compared with 2.6% in 2019. Wages in Canada are calmer than in the U.S. due to stricter pandemic restrictions, a higher participation rate (especially among young workers and women), and lower inflation. What’s keeping the lid on the wage pot? The simplest explanation is that jobless rates, though falling, aren’t low enough to spark wage demands. In fact, they are only modestly below long-run norms and still about 1½ percentage points above the multi-decade lows plumbed before the pandemic (Chart 4). Even in late 2019, seemingly tight labour markets were not exerting intense pressure on compensation. Similarly, the available supply of workers (unemployed plus persons not in the labour force who want a job) remains elevated (Chart 5). Other possible explanations for calm wages are the massive buildup of savings and wealth, which padded spending power and lessened the demand for pay hikes, and generally steady inflation expectations, despite higher actual inflation. An aging population is also damping aggregate wage measures, both because the rapidly-growing 55+ cohort is now seeing slower wage growth than young folks, according to the Atlanta Fed, and because more older workers, who tend to earn more than younger workers, are retiring. A longer-term wage dampener is automation anxiety, which was likely magnified by the pandemic as businesses deployed more digital technology. With some workers hesitant to return to former jobs, many firms turned to automation, such as self-check-out kiosks. Curiously, average hourly earnings haven’t accelerated for truck and delivery drivers, despite reported shortages and surging online sales. The looming threat of autonomous vehicles might be a factor. Though currently in check, wage gains are poised to quicken as worker shortages worsen. In the U.S., nearly 11 million available job positions far outnumber the 8.7 million unemployed persons in July (Chart 6). The 2.2 million gap is the largest on record. The surplus of positions occurred just 1¼ years after the start of the 2020 recession compared with six years for the Great Recession. A mismatch of skills and location has prevented many unemployed people from finding work. There is a wide gap between openings and unemployed in higher-skilled sectors, such as professional services, education, and health care. Many households have permanently moved out of central business districts, where the bulk of service jobs were lost. The rise of remote working cuts both ways, as local employers in industries that are ill-suited for telework are now competing with distant firms for local workers, though the pool of potential workers is also deeper for those industries that are well-suited for telework. Increased entrepreneurship, amid soaring business openings, may also have cut the supply of paid employees. |
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At the same time, many persons outside the labour force who still want a job are not actively searching due to health fears and child-care duties. The expansion of income-support programs has likely dissuaded some people from actively seeking lower-paying jobs. The pandemic spurred early retirement and depressed participation rates, while likely lifting structural unemployment by adding friction to the jobs market. Consequently, our in-house measure of slack in the U.S. jobs market, which compares current and past trends in 16 indicators, suggests the market is even tighter today than before the pandemic. That explains why the quit rate is near historic highs, pressuring businesses to pay more to retain staff. Business surveys confirm the tough task of finding and keeping staff. According to the National Federation of Independent Business, a record number of small businesses have few or no qualified applicants to fill openings. The Fed’s Beige Book finds “a number of Districts reported an acceleration in wages” amid “extensive labor shortages”. Worker shortages are a little less severe in Canada where the participation rate is higher than in the U.S. and close to pre-pandemic levels. However, despite over 1.4 million unemployed, the Canadian Federation of Independent Business finds a near-record shortage of labour. More than 800,000 job openings equate to 4.8% of labour demand (measured as openings plus payrolls), the highest since at least 2015, though below the record U.S. rate of 6.9%. The Bottom Line: The popular perception is that wages are rising fast, likely because they are for lower-wage workers, with big retailers leap-frogging each other to raise minimum pay. For most other workers, however, earnings are not rising much faster than before the pandemic, due to still-elevated unemployment, higher savings and wealth, stable inflation expectations, and fear of losing your job to a robot. Despite hard-to-fill job openings, aggregate wage growth remains surprisingly calm and is not exerting undue pressure on inflation. But an upward shift looms as labour shortages mount, especially if the latest surge in virus infections further impedes workforce participation. Wages are a slow-moving train, and as unemployment nears pre-virus levels, likely by late 2022, workers should gain the upper hand. If companies are able to pass the higher wage bill to customers, as surveys suggest more plan to do, the inflation wheel will spin faster and longer. |