Wage and benefits gains have eased but remain elevated as the Fed tackles high inflation
By Gwynn Guilford and Nick Timiraos Oct. 31, 2023 12:03 pm ET
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Employers spent 1.1% more on wages and benefits in July through September than in the prior
American workers are still commanding big pay raises, though not quite as beefy as last year. That
is good news for workers but a potential complication for the Federal
Reserve’s fight to lower inflation.
Employers spent 1.1% more on wages and benefits in July through September than in the prior three
months, according to the Labor Department’s employment-cost index, released Tuesday. That was
slightly better than the 1% gain in the second quarter and a sign that wage pressures remained
strong as economic growth accelerated.
Fed officials are likely to hold interest rates steady at a 22-year high at their policy meeting
Tuesday and Wednesday as they study the effects of their past hikes. They also are likely to keep
the door open to a future rate increase absent signs of more convincing slowdowns in wage growth
and inflation. The compensation report offers little to change officials’ view that rates will need
to stay at high levels well into next year.
“What we’re dealing with here is a wage-price slinky,” said David Kelly, chief global
strategist at J.P. Morgan Asset Management. “Wages and prices are both coming down the stairs.
They’re just doing it slowly.”
Tuesday’s compensation report pointed to mixed results. From a year earlier, private employers
spent 4.3% more on wages and benefits in the third quarter, down from a 4.5% increase in the prior
quarter and 5.2% rise in the year-earlier period.
But state and local government workers commanded heftier raises in the third quarter, boosting
overall compensation growth. Their pay increased 4.8% in the third quarter from
a year earlier, the fastest pace since records began in 2001.
Fed officials think wage growth needs to slow to about 3% to 3.5% a year for inflation to fall to
their 2% target. For them, the big question is what it will take for that to happen, particularly
given brisk consumer spending and hiring in recent months.
“There’s still lingering strength in demand that’s putting upward pressure on wages,”
said Jonathan Millar, senior U.S. economist at Barclays.
A separate measure of private-sector pay that excludes volatile incentive compensation rose more
slowly in the third quarter, at around a 3.9% annual rate, according to calculations by Jason
Furman, a Harvard University economist.
Private-sector wage growth of around 4% would still be high, but would be well below the recent
5.6% peak recorded in mid-2022.
“All of a sudden, you don’t have as much room to make up to close the gap,” said Eric
Rosengren, former president of the Boston Fed.
Compensation trends vary across the country
Compensation increases differ depending on where workers live. Gains in wages and benefits have
cooled in the Phoenix and Miami metro areas as pandemic-driven population growth subsided there.
Workers in the New York area have seen fairly steady gains so far this year, though their
compensation rose less than during the initial pandemic rebound.
Compensation trends vary by industry as well. Gains at restaurants, bars and retailers have slowed
after peaking in early 2022 as employers rushed to hire enough to keep up with customer demand.
Nursing compensation jumped, as many nurses left the profession or retired during the pandemic, and
growth remains strong. The pace of wage and benefits gains in education
has held fairly steady as schools returned to normal schedules.