Workers have been enjoying fatter paychecks. A slowdown may be ahead

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Workers continue to see pay increases at a fast clip, but there are signs of a slowdown ahead.

Average earnings for all workers grew by 0.3% in April, to $31.85 an hour, the Labor Department said Friday.

That’s a modest reduction from the 0.4% pace in March. It also amounts to a 3.8% increase in pay on an annualized basis, according to an analysis by Harvard University economists Jason Furman and Wilson Powell III. (The analysis adjusts for the types of jobs workers hold.)

“This is considerably slower than the pace of nominal wage growth in 2021 and, if it holds up, would indicate that labor markets may be considerably cooler than previously appreciated,” they wrote.

Wages in the private sector grew at a 3.7% annualized pace in April — a slowdown from recent months and the slowest in a year, Furman and Powell III said.

Workers have been enjoying fatter paychecks as demand for their labor has surged to historical levels during the pandemic recovery.

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Job openings and voluntary departures (or, quits) by workers hit records in March, the Labor Department reported Tuesday. There were nearly two available jobs for every unemployed individual in March, a ratio unseen in the modern era, Federal Reserve chair Jerome Powell said Wednesday.

To fill vacancies, businesses have raised wages at the fastest clip in “many decades,” Powell said.

“It’s a good time to be a worker looking to either change jobs or get a wage increase in your current job,” the Fed chairman said.  

Despite signs of a pullback, wage growth is still elevated. Hourly pay in April was up 5.5% versus April 2021, the Labor Department said Friday, whereas the pace was roughly 3% before the Covid-19 pandemic.

“It seems clear wage growth is slowing down. But will it stabilize at a higher level?” said Daniel Zhao, a senior economist at career site Glassdoor.

Wage gains for rank-and-file workers have decelerated across most industries, Zhao said.

Many workers, with some exceptions, aren’t keeping up with the pace of inflation despite banner gains.

Consumer prices are rising at their fastest pace in about 40 years, the result of factors like a rapid economic reopening, federal Covid-relief funds, war in Ukraine and ongoing pandemic-related challenges like lockdowns in China.

The Federal Reserve is raising interest rates with an eye to cooling the economy and inflation. The policy is designed to rein in a scorching job market, bringing labor supply (workers) more in line with demand (from employers) and likely cooling wage growth in the process.

Otherwise, continually high wage growth could cause a “wage-price spiral,” a cycle whereby fatter paychecks fuel higher prices and high inflation gets entrenched.

Fed officials are trying to calibrate their policy so the labor market is healthy and the U.S. economy doesn’t tip into a recession — an outcome that will be challenging but one officials have a good chance of achieving, Powell said.

“Certainly nobody wants to hear they should get a smaller raise to tackle inflation,” Zhao said. “But in practice if you can get to a world where wage growth is more stable and inflation more stable at a lower level, that would be a healthier economy.”

Sophie Tremblay

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