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MNI INTERVIEW: Fed Model Suggests Wage Growth Normalizing Soon


High frequency U.S. pay data collected by Homebase shows "promising" signs of slowing through the first month of the year and suggests wage growth could cool to pre-Covid levels by early next year, Federal Reserve Bank of St. Louis economist Max Dvorkin told MNI Friday.

Tracking the same worker over time using the Homebase payroll software, Dvorkin found the median wage increase in January declined to 3.8% from around 4.4% in 2022. There's no comparable figure for earlier periods due to data limitations. However, a trimmed mean of wage changes over a four-week period also show the typical seasonal spike in wage growth is 1 to 2 percentage points lower this January compared to last year, Dvorkin said.

"If you worry about inflation and where it’s going, these are very promising figures," he said. "Since the second quarter of 2022, wages increases have been slowing, and if this continue we’ll be able to see something that resembles the kinds of increases seen before the pandemic early next year or late this year."

The Homebase data add to other evidence that wage inflation is moderating even as the labor market remains extraordinarily tight. (See: MNI INTERVIEW: Atlanta Fed Wage Tracker Shows Wage Growth Peaked)

Hiring blew past analyst expectations in January with U.S. employers adding 517,000 jobs and the unemployment rate hitting a fresh 50-year low of 3.4%, the Labor Department reported Friday. Even so, average hourly earnings decelerated by a tenth, lowering the year-on-year increase to 4.4% from a peak of 5.9% last March.


ADP, another private payroll service company, said pay growth for job stayers held at 7.3% in January, down from 7.7% in mid-2022.

The trimmed mean measure of wage changes for the 800,000 or so workers in the Homebase system dipped to 5.8% in 2022 from 6.2% in 2021, but was still much higher than the 3.6% rate seen in 2019. Average measures of wage increases are typically subject to distortions from shifts in the composition of workers, Dvorkin noted. Still, the Homebase data are showing the same patterns visible in other wage growth measures.

"The Fed is increasing rates and trying to cool down the economy and it seems to be working in terms of inflation. Yet the labor market is not suffering all that much," Dvorkin said, noting the breakdown in the tradeoff between inflation and unemployment presents a puzzle for economists.

"Employers are still trying to attract people and retain them, and that’s still translating to wage increases. The battle against inflation is not over. But the new data continue to arrive pointing in the right direction." (See MNI INTERVIEW: US Labor Market Could Have Soft Landing-Paychex)

Source: St. Louis Fed

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MNI Washington Bureau | +1 202-371-2121 |

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