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If the U.S. economy is suffering from the worst labor shortage in decades, why didn’t worker pay increase sharply again in February like it did in the previous 10 months?
Hourly pay rose just a penny in February to $31.58, the government said Friday, marking the smallest increase since January of last year.
It was the biggest surprise of an otherwise strong February employment report and the only disappointing number.
Read: U.S. gains 678,000 jobs in February and unemployment drops to 3.8%
Businesses have been complaining loudly about a big labor shortage and not being able to find workers. Many say they’ve had to offer signing bonuses or boost pay to fill a record 11 million open jobs.
The result has been the fastest increase in wages since the early 1980s. The yearly increase in pay jumped to as high as 5.5% at the start of 2022 before slipping to 5.1% in February.
By contrast, Wall Street had expected a sharp 0.5% increase.
If labor was as hard to find as businesses say, economists point out, wages should keep rising sharply. Companies will have to pay more to attract or retain talent, especially with a record number of people quitting for better opportunities.
“A labor market that is supposed to be extraordinarily tight does not register 0.0% average hourly earnings growth,” said Alex Pelle, U.S. economist at Mizuho Group.
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There’s two possible explanations.
The most likely is that flat wage growth in February is an aberration. The government’s employment report has struggled to capture month-to-month changes in the labor market because of the pandemic and have been subject to large revisions later on.
“The flat average wage in February is likely a fluke, and the tight labor market will drive strong wage growth in the months ahead,” contended chief economist Gus Faucher of PNC Financial Services.
Some business executives agree. One senior executive told ISM that “corporations need to increase wages and salaries to attract talent and get work done.”
The other explanation is that the labor-market shortage is beginning to ease.
Some 300,000 people entered the labor market in February, pushing the increase over the past six months to 2.5 million. Perhaps not coincidentally, economists note, the surge in the labor force began around the time that extra federal benefits for the unemployed expired.
What’s more, the size of the labor force grew to 164 million last month — not far from the pre-pandemic level of 164.6 million.
That’s not to say the labor market has fully recovered.
The economy had been adding around 1.5 million people a year to the labor market before the pandemic.
Various estimates suggest the U.S. is still missing 2 million to 3 million workers — workers that businesses desperately need to keep up with strong demand for their goods and services.
The good news is, the gap could be eliminated in six months if hiring keeps up at the same pace. That will only make the labor market even tighter and underpin the surge in wages.
The bad news? Wage growth is not keeping up with inflation. The cost of living rose a sharp 7.5% as of January — the biggest increase since 1982.
Inflation is widely expected to ease later in the year, but it’s still likely to range around 3% to 4%, economists predict.
