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Early Rising Wages Resemble Business Cycles of the 70s

Wage Gains
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EDITOR NOTE: Why, you may ask, are economists comparing today’s inflationary uptick with that of the 1970s? The irony here is that the Fed is focused on the labor market, seeing slack in the figures matching record-level job openings with record-level unemployment. Wage inflation appears to be the red line beyond which tapering will take place (at the risk of crashing the market). Yet jobs data shows that wages are rising at a record pace early on in a business cycle, the author below claims. The only parallel to this development is that which we saw in the 1970s. Hence, the comparison. If the comparative models are accurate, what we’re dealing with now is not a “transitory” inflationary surge but a potentially excruciating economic downturn. In other words, if you believe in the Fed, then up ahead are blue skies in the realm of appreciating assets. If you don’t, then you should be worried. If you weren’t around to experience how inflation “swung” in the 1970s, then you’re about to get a live history lesson. How you emerge on the other side of it is completely in your hands. 

Investors and businesses viewed the recent jobs and wage data differently. Investors saw the below-consensus gain in employment as friendly to risk-based assets. Companies would counter, saying it took three times the consensus gain (0.6%) in average hourly earnings, and probably other compensation-sweeteners, to attract the 559,000 workers in May.

Rising wages so early in a business cycle resemble the US economy of the 1970s, not the one investors and policymakers have seen since 1980. Rising labor costs will continue to put downward pressure on firms operating margins, which have already declined for the past two quarters, and add to general inflation pressures that policymakers would soon discover are not "transitory." Investors and policymakers forewarned.

Evidence of A Fast Wage Cycle

In May, average hourly earnings for private-sector workers, excluding supervisory staff, rose 0.6%, three faster than consensus estimates. That comes on the heels of an even more significant 0.8% increase in April. That two-month increase is the fastest in this wage series since 1983 (excluding the wage distortions during the pandemic).

More importantly, it extends the rising wage cycle that has been quickly emerging for several months and runs counter to the early cycle decelerating wage pattern that has been a recurring feature for the past 40 years.

The National Bureau of Economic Research (NBER) has yet to date the end of the 2020 recession. Based on a long list of economic data, it's reasonable to conclude that the recession's end occurred in late 2020.

Comparing the wage data of the past six months shows a close resemblance to the 1970 economic cycles and not the business cycles the current generation of policymakers and investors has grown accustomed to seeing.

In the 1970s, wage growth started to accelerate immediately when the economy began to recover, similar to what is happening nowadays. Each period has unique features, but the common themes are the lack of labor supply and the need to raise pay to attract workers.

Both episodes contrast to the wage pattern that emerged in the four economic upturns from 1980 to 2020. In each of the four economic upturns since 1980, wage gains for private-sector workers decelerated for several years, enabling companies to source cheap labor and expand profit margins. Part of that deceleration also reflects the shift in hiring from relatively higher-paid to lower-paid workers.Yet, in the past six months, over one-third of new jobs were created in the lower-paid industries (i.e., leisure and hospitality), and average hourly earnings growth still accelerated to its fastest rate since 1983.

Once started, wage cycles gain momentum of their own. Faced with a shrinking supply of skilled and unskilled labor, companies start competing with each other. And employed workers, along with people sitting on the sidelines, become well aware of the more worker-friendly environment and use it as leverage to gain more pay and benefits.

Record job vacancies say the wage cycle has a long life ahead and is not "transitory" or temporary.Rising Wages

Original post from The Carson Report

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