Accelerating Wage Inflation? – Don’t Bet the Ranch
Written by Richard Hokenson
As we expected, the December employment data revealed an uptick in both the labor force participation rate and the unemployment rate. Nearly all of the commentary, however, focused on the news that the year-ago percent change in average hourly earnings (AHE) jumped to 2.9% in December, its highest reading since 2009 (see Chart 1).
As we have noted before, however, AHE is not a pure measure of wages – it is affected by the composition of jobs. If more people take higher paying jobs it will push AHE up (or vice versa). The only “pure” measure of wages is the Employment Cost Index (ECI). Unfortunately, the ECI is only available on a quarterly basis - as of the third quarter of last year, the ECI continued to confirm moderation not acceleration in wages (see Chart 2).
The value for the fourth quarter of 2016 will be released on January 31 and then we can determine if the acceleration in the AHE was a one-month fluke or a sign that labor markets are becoming too tight. Our view has been and remains that there is more slack in the labor markets than most believe.
Last month’s forecast that December would reveal an uptick in participation and unemployment was based on the observation that the November decline net flows from not in labor force to unemployment was a one-month fluke (like May 2016) that would be reversed in December (see Chart 3).
Although most of the analysis focused on AHE, there were several other aspects of the data that were solidly positive:
- The number of long-term unemployed resumed its decline and the probability that the unemployed will become employed registered a nice increase (see Chart 4 and 5).
- The number of employed millennials increased by 233,000 in December, its biggest monthly gain since January of last year. This is good news for household formations.
Richard Hokenson is a pioneer in the application of demographics to economic and financial market forecasting.