MNI INTERVIEW: US Wage Pressures Likely To Be Longer Lasting

The U.S. is likely to see continued strong wage pressures even if an economic slowdown raises unemployment over the next year, barring a recovery in labor force participation closer to pre-Covid levels, Yale University professor and visiting scholar at the Federal Reserve Bank of Philadelphia Giuseppe Moscarini told MNI.

Labor flow trends show the fraction of workers who move from job to job every month is falling, while the job-finding rate for the unemployed remains elevated, according to Moscarini. That indicates a shrinking supply of labor from those looking to switch jobs -- and continued upward pressure on labor costs and inflation, he said in an interview.

Perversely, high labor demand also suppresses labor supply, because people feel they can wait to rejoin without missing the boat, he said. At 62.2%, workforce participation is still a full percentage point below its pre-pandemic level, enough to raise the unemployment rate by a third if all the missing workers joined at once.

"Bottom line, I expect no moderation in wage growth in the short run. Real wages lost a lot of ground," Moscarini said. "Once the non-participants rejoin, pulled by higher wages or pushed by low stock returns, we could see an effect."

SHRINKING SLACK

Wage growth is predicted much more accurately by labor market flows, not stocks like the unemployment rate, Moscarini said.

Coming out of the pandemic in 2021, as employees reflected on their priorities, quit their jobs or changed sectors, both the job-finding and job-switching rates rose, indicating a high degree of mismatch in the workforce. Wage pressure was contained as workers moved to better-fitting jobs.

Job openings are still abundant this year, but the job-switching rate has fallen as workers became happy to remain where they are. A number of current vacancies are likely replacement hiring as people quit, and those are less likely to be suppressed by weak demand, Moscarini noted. (See: MNI INTERVIEW: Fed Can Cool Economy With Modest Job Losses)

With labor supply shrinking, wage growth took off. The employment cost index, a measure of wages and benefits, hit its fastest annual pace in decades in the second quarter of 2022, and cooled just slightly in the third quarter.

"Presumably in 2021 there was a lot of post-pandemic mismatch. In 2022, this reallocation had happened and we started digging into shrinking slack," Moscarini said.

STEEPER PHILLIPS CURVE

Moscarini's research also constructs a wage Phillips curve relating measures of labor market flows -- rather than unemployment -- to wage inflation and finds the flows data outperforms the unemployment rate as a source of wage pressure.

"Labor market theory in macroeconomics has been about flows for at least 40 years. Empirical support for this view is enormous. Media and, partially, the Fed are stuck in the 1970s," he said. "The unemployment rate is only a part of the picture, and the less interesting one."