From one of many daily email newsletters I get - earlier today:
There's new fodder in the debate about why wage growth soared as the economy rebounded from its pandemic slump — with big implications for how policymakers should approach the fight against inflation.
What's new: An
intriguing new paper from Cleveland Fed economists found the ultra-tight labor market that helped define the COVID-19 recovery may not explain soaring wage growth after all.
What they're saying: "While labor market imbalances have been large in the postpandemic period, they induced both downward and upward pressures on wage growth and do not account for the increase in average wage growth," Cleveland Fed economists Martin DeLuca and Willem Van Zandweghe write.
- Rather, the economists conclude rapid wage growth in recent years is "largely due to the pass-through of higher inflation since the pandemic," one that reflects higher compensation for a higher cost of living.
Flashback: As inflation took off, wage growth followed. Various measures, including average hourly earnings (released monthly) and the quarterly Employment Cost Index, began to accelerate.
- That happened as the demand for workers clearly exceeded the supply of them. There were more job openings than ever before, but workers who had left the labor force — because of child care issues, lingering fears of COVID-19 and more financial flexibility thanks to the fiscal stimulus package — were slow to reenter.
- At a news conference in March 2022, when the central bank started what ultimately became an aggressive interest rate-hiking campaign, Powell said the "misalignment of demand and supply, particularly in the labor market" was "leading to wages moving up at ways that are not consistent with 2 percent inflation over time."
The other side: Analysis by the Cleveland Fed economists, however, found that labor market imbalances during the pandemic contributed no more to the average level of wage growth than before the pandemic.
- "Thus, we conclude that the post-pandemic increase in wage growth largely reflects higher inflation and does not reflect labor market imbalances," DeLuca and Van Zandweghe write.
- Since "inflation has come down from its peak in mid-2022," they add, that suggests "a decline in wage growth from diminishing inflation pass-through."
The bottom line: So far, cooler inflation has not come alongside a jump in unemployment, as some economists feared would be necessary. But Fed officials are worried the still-tight labor market remains a risk for inflation.
- At the last policy meeting, policymakers said "the labor market continued to be very tight," though there were signs "that demand and supply were coming into better balance," minutes released this week show.
- But while wage growth had moderated, pay was still "rising at rates above levels" consistent with its 2% inflation target and "further progress toward a balancing of demand and supply in the labor market was needed."
