After six straight years of annual job gains topping 2 million, America’s labor market is as tight as ever, and it’s entering the next phase: an enduring pickup in wages.
Average hourly earnings jumped by 2.9% in the 12 months through December, the most since the latest recession ended in June 2009, according to the Labor Department’s employment report released Jan. 6 in Washington. Workers in almost every category, from mining and construction to retail and education, saw paychecks rise from November. The 4.7% jobless rate remains close to a nine-year low, even with a tick up in December.
Job and wage prospects would improve even more after any successful legislation aimed at stirring growth, such as tax cuts and infrastructure investment, as President-elect Donald Trump has promised.
“The trend is clearly moving toward firmer wage growth,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The labor market is tight and getting tighter. I expect to see continued acceleration in wages this year.”
The encouraging news on worker pay underscores the next stage of the labor-market recovery, which was defined by years of wage stagnation amid strong growth in payrolls. Now, the economy is adding jobs at a slower pace and measures of slack are diminishing, meaning labor shortages may become more common. That makes a sustained acceleration in paychecks critical to boosting household income and supporting spending.
Some cooling in the job market was apparent in the latest report. Payrolls climbed by 156,000 in December after 204,000 in November, and the participation rate increased to 62.7%, which may continue as more people are drawn into the labor force and find work. Other measures of slack improved, including a drop in the number of Americans working part time who would rather have a full-time position.
The December report revealed that the uptick in the unemployment rate was a positive: More Americans joined the labor force but had not yet found jobs, according to the government’s labor flows data. The number of people who were jobless and gave up looking for work declined to a three-month low. One caveat: Fewer people who were already in the labor force but unemployed were able to find jobs.
The December increase in wages followed a 2.5% advance in the prior month. The improvement, in part, may have reflected the unwinding of a calendar quirk that muffled the November tally. Because the 15th of the month fell within the employment survey week, increases in pay are more likely to have been captured.
Even so, year-over-year hourly earnings have accelerated in three of the past four months, and wages were up 0.4% from November, matching the fastest pace since last January.
Among industries that posted the biggest hourly wage gains were mining and logging, rising 0.8% from the previous month, and retail, up 0.6%. Construction workers saw earnings increase 0.4%, as did Americans in leisure and hospitality.
Not everyone is getting excited just yet. Barclays economists Rob Martin and Michael Gapen pointed out the more modest 2.5% year-over-year December gain in earnings for production and nonsupervisory workers, which exclude managers.
“Although the solid wage numbers in December are welcome, this month’s data followed several months of relatively weak prints and do not change our view on wage growth,” Martin and Gapen said in a note. “We continue to expect modest wage gains over the next year, as we see little slack in labor markets and expect the unemployment rate to continue its long-term trend decline.”
The pickup in wages, sustained over time, also would feed into broader price pressures. That would be consistent with the view that inflation continues to move toward the goal of the Federal Reserve, which raised interest rates in December and expects to lift them three times this year.
The strong wage gain for 2016 “strengthens the position of policymakers that think the Fed needs to get on with its normalization of official rates,” Joe Carson, director of global economic research at AllianceBernstein, wrote in a note.
Potential fiscal stimulus from Congress and the new administration in 2017 “should raise expectations of more wage and price gains. In short, the Fed is falling behind the curve and even more so if fiscal stimulus is enacted soon,” he said.