– by a New Deal Democrat
I had already planned to do an updated look at wage growth today, but there was a bit of a flutter on Twitter about last week’s job vacancies and first quarter wages and earnings data, so that seals the deal.
More precisely: as I wrote many times during the last expansion, wage growth is a long-lagging indicator. It tends to increase only after unemployment (or even better, underemployment) falls to a level where labor begins to have some bargaining power. For the underemployment rate, it is around 9%. It took more than half a decade after the Great Recession for the U6 rate to reach this mark:
So the graph below subtracts the U6 rate from 9% (red), so any rate lower than 9% is shown as positive, compared to the year-over-year change in unsupervised average wages (light blue) and wages as measured by the quarterly employment cost index (dark blue):
As the unemployment rate reached over 20% in the first few months of the pandemic, the continuation chart eliminates those months and rises in the last quarter of 2020:
As the labor market tightened, wage growth continued to accelerate.
Economist Jason Furman made a similar point a few days ago, comparing the number of job openings to wage growth. Here is his graph:
A chart of the quarterly % change in wages growth in the unsupervised wages and employment cost index does not correlate particularly well with the quarterly % change in vacancies:
But the year-over-year change in wages correlates with the absolute level of job vacancies:
As the employment rate continues to reach post-pandemic equilibrium, the vacancy rate will continue to decline and the underemployment rate will likely increase. This will also lead to a slowdown in wage growth.