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Wages: The Biggest Number in the Jobs Report
Inflation isn't just about oil and commodity prices or production costs. The size of workers' paychecks also plays a significant role. When people have more cash in their wallets, they're more likely to spend it, giving businesses more room to raise prices.
According to the August employment report, average hourly earnings have increased by 5.2% over the past 12 months. While this is a decrease from the peak growth rate of 5.6% in March, it's still historically high. Before the pandemic, wage growth typically only increased by about 3% in a year.
However, the power balance has shifted away from employers towards workers. The combination of the Covid-19-induced labor shortage and people leaving the workforce has left employers scrambling to attract and retain talent, leading to higher wage demands.
But what does this mean for the Federal Reserve (Fed)? If wages remain high, businesses can afford to keep raising prices, potentially leading to further inflation. If wages decline, though, businesses risk a significant drop in demand.
Another concern is that wage growth hasn't kept pace with rising consumer prices. Although average hourly earnings have increased, they haven't quite matched the rates of inflation.
"Wages are a real problem," said Marta Norton, Chief Investment Officer for Americas at Morningstar Investment Management. "People are paying more, but they're not earning more." This disparity between wages and inflation could lead to higher income inequality and negative economic consequences.
So, what's the solution? Some economists suggest government action to address the labor shortage, such as increasing immigration or investing in education and vocational training. Others argue for a more hands-off approach, allowing the market to correct itself through natural economic forces.
In any case, the relationship between wages, inflation, and economic stability is a complex one. As the Fed navigates these challenges, it must balance the need for low inflation with the need for a strong labor market and healthy economic growth.
Enrichment Data Integration:
- According to the Federal Reserve, the employment market remains strong. The unemployment rate is low, and job openings continue to exceed the number of available workers. However, concerns about wage growth and its impact on inflation persist.
- Some economists argue that the current wage growth is unsustainable in the long term, and that the labor market will eventually self-correct, leading to slower wage growth and lower inflation.
- Some governments have implemented policies to address the labor shortage, such as offering incentives for companies to hire and train workers, as well as investing in education and vocational training.
