US Employment Costs Slow to Finish 2022, Inflation-Adjusted Wages Still Negative
US Employment Costs Slow to Finish 2022, Inflation-Adjusted Wages Still Negative

By Andrew Moran

Employment costs rose in the fourth quarter at a lower-than-expected pace, according to new data from the Bureau of Labor Statistics (BLS).

In the three months ended in December, the Employment Cost Index (ECI) advanced 1 percent, slightly lower than economists’ expectations of 1.1 percent. This is down from the 1.2 percent increase in the third quarter and represented the third consecutive quarterly slowdown.

Within the ECI, wages rose 1 percent quarter over quarter, and benefits edged up 0.8 percent. Both were down from 1 percent and 1.3 percent, respectively.

On an annualized basis, compensation costs for civilian workers climbed 5.1 percent for the 12-month span ended in December, up from 5 percent in the third quarter. Benefit costs rose 4.8 percent year over year.

When adjusted for inflation in the 12 months ended in December, real private wages and salaries tumbled 1.2 percent. Inflation-adjusted benefit costs fell 1.5 percent year over year.

There was little market reaction following the report, with the leading benchmark indexes relatively flat as investors digested the numbers and tried to determine how the Federal Reserve would respond to the data.

The ECI has become a critical report for the U.S. central bank and its monetary policy decision-making.

“This is incrementally good for the Fed’s concern over tight labor,” tweeted Liz Young, the head of investment strategy at SoFi.

Earlier this month, Federal Reserve Vice Chair Lael Brainard said at the University of Chicago Booth School of Business that there have been “tentative signs that wage growth is moderating,” adding that she would pay attention to the ECI to determine if these trends are found in other compensation-related data.

Lael Brainard, vice chair of the Federal Reserve. (Drew Angerer/Getty Images)

“Growth in average hourly earnings has softened recently—stepping down to 4.1 percent annualized growth on a three-month basis in December from roughly 4.5 percent on a six-month and 12-month basis,” she stated.” I will be watching to see whether the employment cost index data at the end of this month show the deceleration from the third quarter continuing into the fourth quarter.”

But while many economists argue that higher wages were not the initial driver of rampant price inflation, Fed officials are concerned that if employee compensation levels continue increasing around 5 percent annually, it could be challenging for the institution to return inflation to its target rate of 2 percent.

“We want strong wage increases. We just want them to be at a level that’s consistent with 2 percent inflation,” Fed Chair Jerome Powell told reporters at last month’s post-Federal Open Market Committee (FOMC) meeting news conference, adding that standard productivity estimates suggest wages are above what would be consistent with 2 percent inflation.

In order to slow down the rate of wage increases, the Fed has been raising interest rates. The central bank’s quantitative-tightening cycle aims to scale back business investment and consumer spending, effectively killing demand for labor and various goods and services.

The Fed has been assessing a broad array of labor metrics—from the monthly non-farm payrolls (NFP) report to the JOLTs openings to labor costs—to determine if it is achieving these goals.

This week, the BLS will release these key employment numbers.

Economists anticipate that the U.S. economy created 185,000 new jobs in January. If accurate, it would be down from the 223,000 positions created in December. The reading would also represent the sixth consecutive monthly decrease in new jobs.

The market is also expecting the unemployment rate to tick up to 3.6 percent, employment openings to fall to 10.23 million, and average hourly earnings growth to ease to 4.3 percent.

What Will 2023 Bring for Workers?

Should the labor market continue easing, it could be a challenge for many workers in the upcoming year.

Despite many economists and market analysts penciling in a recession this year, a growing number of workers are planning to find a new job this year, according to a recent poll by tech firm Arris. The survey also revealed that higher salaries had topped workers’ wish lists.

“Given the current labor market, people feel they can find other jobs which have better conditions and are willing to take the risk of leaving,” said Lotte Bailyn, an MIT professor, in a recent WalletHub report analyzing job resignation rates across the United States.

But these conditions may not favor workers for much longer.

The latest Bankrate quarterly Economic Indicator poll of economists revealed that employers are projected to add only 42,000 jobs every month over the next year, with the jobless rate rising to 5.22 percent a year from now.

Fitch Ratings purported that there will be significant job losses in 2023 as the “labor market rebalances.”

While labor demand exceeds labor supply by approximately 5 million, the imbalance will be resolved by the coming economic slowdown, says Olu Sonola, Fitch’s head of U.S. regional economics.

“The lagged impact of aggressive Fed tightening, the drag on real wages from high inflation, and knock-on impacts from the downturn in Europe will drive the U.S. economy into recession territory next year—with the unemployment rate increasing to 4.7 percent at the end of 2023, and peaking at 5.3 percent in 2024,” Sonola wrote in a note.

The Federal Reserve projects that the unemployment rate will shoot up to 4.6 percent this year.

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