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Markets and Economy

The Return of Worker Pay

Despite businesses struggling to fill open jobs as the unemployment rate nears record lows, wages have been relatively stagnant. But new data from the first half of 2018 suggest worker pay is finally rising faster—signaling ongoing benefits for employees and the economy overall.


By most measures, the recovery has been nearing completion for some time. Wages, however, have been stubbornly slow to take off. Pay gains have averaged just 2.1 percent annually from 2009 to 2017, despite the labor market tightening throughout that time.

This summer, an acceleration in wage growth finally arrived. The Employment Cost Index shows private-sector hourly compensation rising at a 3.25 percent annualized rate over the first six months of 2018. Monthly data from the Bureau of Labor Statistics confirms this trend; total hourly compensation jumped 0.4 percent in August, bringing total pay growth over the past 12 months to 3 percent.

Stronger wage growth may finally put an end to worries about secular stagnation. Corporate bottom lines are robust, and with workers sharing in the economy’s momentum, the Federal Reserve may see little reason to delay continued interest rate normalization. Now that the business cycle is undoubtedly approaching its peak, the Fed may be able to remove unnecessary stimulus and adopt policies that will prolong the expansion.

What’s Taken Wages So Long?

With the headline unemployment rate pushing toward historic lows, anecdotes of businesses struggling to find and retain qualified workers are common. So it may seem puzzling that, until recently, wages have remained stagnant.

In reality, the labor market likely still contains significant sources of slack. Millions of discouraged workforce dropouts are slowly returning to the job hunt, and their ranks have yet to be entirely absorbed. Workers also have less leverage over their paychecks than in the past—deregulation and global competition have made the workforce more flexible, but they’re also limiting workers’ power to demand higher wages. Companies competing for market share against foreign manufacturers are reluctant to offer pay raises that would push their prices higher.

Hidden Benefits

Measures of pay that focus on hourly wages may fail to capture important sources of compensation. A full 38 percent of the average US worker’s total compensation is composed of nonwage benefits like health insurance, retirement benefits and paid vacation. For many employees, generous benefit packages may have been hiding in stagnant paychecks.

Looking at comprehensive pay trends, the current business cycle has not been so far out of the ordinary. Real pay is rising more slowly than in the past, but compensation has been keeping pace with improvements in worker productivity. In a globalized economy, the route to higher pay likely runs through technological advances that will make workers more productive.

Productivity to Curb Inflation

In past business cycles, accelerating wage growth has often marked the start of an inflationary spiral. In a tight labor market, rising pay can squeeze businesses’ bottom lines, forcing retail prices higher.

Today, the situation looks far different. Corporate bottom lines are robust; after-tax profits account for 9.8 percent of gross domestic income, up from their historical average of approximately 6 percent. This is likely due to tax relief legislation passed last year, which lowered the corporate tax burden.

The tax bill has often been criticized for only helping corporations, but leaving more money in the private sector has encouraged capital investment in productivity-enhancing technologies. In turn, this is making workers’ time more valuable, as well as generating wider profit margins that are allowing wages to climb without spurring inflation. The dividends from investing in workplace productivity could be widespread, helping workers and businesses alike.

Bolstering Normalization

Throughout the recovery, skeptics have pointed to supposed sources of fragility in the economy, claiming that the Fed’s monetary stimulus can’t be removed without endangering the expansion. One by one, worries about problems like structural unemployment and slow growth have faded as the economy regained its footing. This year’s acceleration in pay should mark the end of concerns about secular stagnation and encourage the Fed to continue normalizing interest rates.

The gradual rise of interest rates should prolong the expansion. By moving borrowing costs back toward their natural equilibrium, the Fed’s policies can contain inflationary pressure and prevent the emergence of imbalances that could precipitate the next recession. Workers are sharing in the economy’s strength, and the Fed’s policies are poised to extend the peak of the business cycle.

View our economic commentary disclaimer.

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman

Jim Glassman, Head Economist, Commercial Banking

Jim Glassman is the Managing Director and Head Economist for Commercial Banking. From regulations and technology to globalization and consumer habits, Jim's insights are used by companies and industries to help them better understand the changing economy and its impact on their businesses.

Jim Glassman

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