For years now, the slack in the labor market has kept a lid on wages. It has taken much longer for people (who are actually looking for a job) to find something. The theory goes, as the unemployment pool declines, competition for labor among employers forces them to offer higher wages to workers. The Employment Cost Index is the broadest measure of wages and a useful tool in monitoring the theory.
As we can see in the chart above, the ECI is finally starting to show some sustained gains in wage growth. This is one of the signs the Fed has been waiting to see as it debates when to pull the trigger on a rate hike. The consensus and expectation is that once started, the Fed will raise rates slowly and in very small intervals. However, recent Unemployment Claims data may throw a wrench in the works.
This week, Weekly Jobless Claims (already well below a long term average) fell through a historic mark from the tech crash back in 2000 to hit a 42 year low point. The data suggests that the unemployment rate will likely continue to drop putting additional pressure on employers to hike wages. Keep watching these wage numbers…a meaningful surprise to the upside is great for consumers, but it puts the Fed in a very uncomfortable position. They may be forced to deviate from consensus and move faster.
Spicer, Jonathan: “Wage history signals U.S. employment nearly as good as it gets” – Reuters 4/30/15