Accelerating Wages Early In The Upturn Resemble The ’70s Business Cycles
Investors and businesses viewed the recent jobs and wage data differently. Investors saw the below-consensus gain in employment as friendly to risk-based assets. Companies would counter, saying it took three times the consensus gain (0.6%) in average hourly earnings, and probably other compensation-sweeteners, to attract the 559,000 workers in May.
Rising wages so early in a business cycle resemble the US economy of the 1970s, not the one investors and policymakers have seen since 1980. Rising labor costs will continue to put downward pressure on firms operating margins, which have already declined for the past two quarters, and add to general inflation pressures that policymakers would soon discover are not “transitory.” Investors and policymakers forewarned.
Evidence of A Fast Wage Cycle
In May, average hourly earnings for private-sector workers, excluding supervisory staff, rose 0.6%, three faster than consensus estimates. That comes on the heels of an even more significant 0.8% increase in April. That two-month increase is the fastest in this wage series since 1983 (excluding the wage distortions during the pandemic).
More importantly, it extends the rising wage cycle that has been quickly emerging for several months and runs counter to the early cycle decelerating wage pattern that has been a recurring feature for the past 40 years.
The National Bureau of Economic Research (NBER) has yet to date the end of the 2020 recession. Based on a long list of economic data, it’s reasonable to conclude that the recession’s end occurred in late 2020.
Comparing the wage data of the past six months shows a close resemblance to the 1970 economic cycles and not the business cycles the current generation of policymakers and investors has grown accustomed to seeing.
In the 1970s, wage growth started to accelerate immediately when the economy began to recover, similar to what is happening nowadays. Each period has unique features, but the common themes are the lack of labor supply and the need to raise pay to attract workers.
Both episodes contrast to the wage pattern that emerged in the four economic upturns from 1980 to 2020. In each of the four economic upturns since 1980, wage gains for private-sector workers decelerated for several years, enabling companies to source cheap labor and expand profit margins. Part of that deceleration also reflects the shift in hiring from relatively higher-paid to lower-paid workers.
Yet, in the past six months, over one-third of new jobs were created in the lower-paid industries (i.e., leisure and hospitality), and average hourly earnings growth still accelerated to its fastest rate since 1983.
Once started, wage cycles gain momentum of their own. Faced with a shrinking supply of skilled and unskilled labor, companies start competing with each other. And employed workers, along with people sitting on the sidelines, become well aware of the more worker-friendly environment and use it as leverage to gain more pay and benefits.
Record job vacancies say the wage cycle has a long life ahead and is not “transitory” or temporary.