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Economic Insights

Continued increases in average hourly earnings could set the stage for an uptick in inflation.

The U.S. labor market continued to show strength in August, according to a report from the U.S. Bureau of Labor Statistics released on September 7. Total nonfarm payroll employment grew by 201,000 for the month, while the unemployment rate held at 3.9%. Employment growth picked up in service-providing industries and decelerated in goods-producing sectors, in contrast to the trend over the past year. Manufacturing employment fell. Job growth has been strongest in health care and very weak in retail trade. Government employment growth has remained notably soft, although this has been the new normal for quite a while.

But the biggest news in the August employment report came in from the wage data. Here’s the key chart:

 

Chart 1. U.S. Wage Growth Has Begun to Accelerate
Average hourly earnings for designated categories, March 2007–August 2018

Source: Bloomberg and Lord Abbett.

 

Average hourly earnings in the private sector increased at an annual rate of 2.9% in August, up from 2.7% in July. This is important because acceleration in average hourly earnings is the basic condition for increasing cost-push inflation pressure. And though it’s a necessary condition, it’s not a sufficient one.

Below the surface, data from the establishment survey (from which the nonfarm payrolls numbers are derived) continue to exhibit classic signs of a steadily tightening labor market in the composition of job gains and wage changes. Job growth is stronger in higher-paying jobs, as workers are motivated to move up the pay scale and confident enough to do so without fear of imminent layoffs.

Meanwhile, wage gains are highest in lower-paying jobs, for which employers have greater difficulty attracting workers, and lower in higher-paying jobs, where employers have less difficulty. But the direction for both is higher, and thus the average across all pay levels also is accelerating.

Summing Up
The August data continue to show that the U.S. job-creation machine is humming along nicely, despite concerns about the effect of U.S. trade disputes on employers. But emerging trends in average hourly wage and labor-supply data suggest that this strength, if it continues, may be setting the stage for a notable uptick in inflation. 

 

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