Wage growth slowed this spring, the latest sign that the Federal Reserve could succeed in delivering a “soft landing” for the US economy.
Total compensation costs, including both wages and benefits, rose 1 percent in the second quarter, compared to 1.2 percent in the first three months of the year, the Labor Department said Friday. Remuneration was 4.5 percent higher than a year earlier, the lowest growth in more than a year.
A narrower measure, which only includes wages and salaries of private sector companies, also rose 1 percent, up from 1.2 percent in the first quarter.
Smaller pay increases may sound like bad news. But they will be welcomed by policymakers at the Fed, who fear that rapidly rising wages could make inflation more difficult to control. They have hoped to cool the economy just enough so that wage and price increases can slow down without causing a significant rise in unemployment.
So far that is exactly what is happening. Wage growth has weakened in recent months by various measures, but inflation has fallen even more. Employees are therefore better off: wages, adjusted for inflation, rose in the second quarter for the first time in two years.
“Households are getting some purchasing power back,” said Beth Ann Bovino, chief economist at US Bank.
Still, many economists believe wages are still rising too fast for the Fed’s comfort, especially in certain industries such as leisure and hospitality. If compensation costs continue to rise at the recent rate, companies will likely continue to raise prices, especially if consumers prove willing to spend anyway, as they did recently.
“Ultimately, if the wage bill rises between 4 and 4.5 percent, it will be difficult for the Fed to trust that services inflation will be in line with their desired outcome,” said Michael Gapen, chief US economist. for Bank of America.
The slowdown in wage growth has surprised some economists because the unemployment rate remains very low, which would normally put pressure on companies to raise wages to attract and retain workers. But other evidence suggests that the labor market has softened, even without a large increase in unemployment. Employers are posting fewer job openings, adding fewer new jobs and removing fewer workers from competitors, all signs that demand for workers has declined. At the same time, the supply of workers has increased as immigration has increased and more people are coming from the sidelines to join the workforce.
Employers have reported in recent months that they find staff more easily. In a survey of companies published this week by the National Association of Business Economists, a majority of respondents said wages at their companies were unchanged in the second quarter — the first time this happened in 2021.
“Labor is still a problem, the job market is still tight, but companies are starting to figure out how to make do with what they have,” Lester Jones, chief economist for the National Beer Wholesalers Association, said in a conference call to discuss the survey. He added: “We see companies just getting smarter with the employees they have and just trying to be more efficient and not trying to chase employees like we did coming out of Covid.”
Economists will get more information on the labor market next week when the Labor Department releases data on job growth in July. That report will include an earnings metric that is more timely than the data released on Friday, though it is generally considered less reliable.