Employers continued hiking workers’ pay at a brisker-than-expected pace, but the increases still weren’t enough to compensate for the even faster rise in inflation.
Wages and salaries for civilian workers increased 1.4% in the second quarter and 5.3% over the year ending in June, according to the Bureau of Labor Statistics’ Employment Cost Index, released Friday. Both measures show swifter growth than in the first quarter.
The 12-month jump was the highest since the spring of 1983, though the quarterly change did not surpass the 1.5% increase in the fall of 2021.
However, the picture is not as rosy once inflation is taken into account. Wages and salaries declined 3.5% over the past year, after adjusting for rising prices.
That’s just a touch better than the 3.6% drop for the year ending in March, which was the largest decrease since the bureau began keeping inflation-adjusted records in 2001.
The data shows that people are really falling behind, said Jason Furman, an economics professor at Harvard University and former chair of the Council of Economic Advisers in the Obama administration.
“And they’re falling behind, not because wage growth is slowing, but because price growth is so high,” Furman said. “And that’s a worrisome sign for the future.”
The super-tight labor market during the Covid-19 pandemic has forced employers to increase their compensation to fill open positions and hold on to their staff, though the raises aren’t keeping up with the cost of living.
This is adding to concerns about the duration and pervasiveness of inflation.
The Employment Cost Index report is a favorite of the Federal Reserve, which is closely monitoring the extent to which skyrocketing inflation is boosting wages to help it determine how much to hike interest rates. The US central bank on Wednesday approved its second-straight three-quarters of a percentage point rate hike as it tries to tamp down rising prices.
In a press conference Wednesday, Fed chair Jerome Powell called the index “important” because of how it accounts for the composition of the labor market.
The data tracks changes in employers’ labor costs for wages and salaries, along with health, retirement and other benefits. The index is not subject to the same distortions as other measures, such as average hourly earnings, because it keeps the composition of the workforce constant.
Wage growth won’t abate until the labor market turns and gets weaker, said Robert Fry, chief economist at his eponymous firm. Employers have continued adding jobs even as the economy contracted in the second quarter.
“You need a higher unemployment rate and more slack there to get wage increases back down,” said Fry, who expects to see price growth start to slow before pay hikes do.
Cost of benefits cools
Overall, the growth in employers’ compensation costs moderated slightly in the second quarter, coming in at 1.3%, before accounting for inflation. That compares to 1.4% in the first quarter but was still slightly higher growth than economists expected.
However, over the course of the year ending in June, total compensation costs jumped 5.1%, a quicker pace than the 4.5% increase for the year ending in March.
The growth in benefits costs, which takes into account the amount paid for retirement, health and other benefits, dipped to 1.2% for the spring, compared to 1.8% in the prior quarter.
Benefits costs increased 4.8% over the most recent 12 months, compared to 4.1% over the year ending in March.
The hotter-than-projected wage data, as well as a new 40-year high in another key inflation measure released on Friday, means that the Federal Reserve will most likely continue raising interest rates this year.
The Personal Consumption Expenditures price index, which measures the change in the prices of goods and services purchased by consumers, rose by 6.8% in June as compared to the same period last year, according to data from the Bureau of Economic Analysis.
“There was nothing in today’s reports that’s going to cause the Fed to question whether they should keep tightening,” Fry said. “I’d lean towards 75 basis points the next time too, until we see some kind of break on inflation, both wages and prices.”