Rising US average earnings growth casts doubt on the Federal Open Market Committee’s current assessment that “there remains significant underutilization of labor resources”.
Annual growth in average hourly earnings of production and nonsupervisory employees on private nonfarm payrolls increased to 2.5% in August, the highest since May 2010 and up from a low of 1.3% in October 2012.
In her Jackson Hole speech, Fed Chair Janet Yellen suggested that the FOMC is monitoring new composite measures of labour market conditions, constructed by using statistical methods to extract common information from a large number of indicators. Economists at the Kansas City Fed, for example, have created indices of the level and rate of change of labour market activity based on 24 indicators. The level measure has been trending higher since 2010 but remains 0.6 standard deviations below its historical average, consistent with the FOMC’s judgement of still-significant slack – see chart.
Such an approach, however, ignores possible structural shifts in the component indicators – the historical average may not be a good guide to “normal” conditions now.
The choice of indicators, moreover, is important: they should reflect all aspects of labour market behaviour. A notable omission from the Kansas City Fed activity measure is the job openings rate, i.e. the percentage of available jobs that are unfilled. This rose to 3.3% in June / July, matching the cyclical high reached in 2006-07, suggesting that employers now face significant difficulties recruiting suitable workers.
The job openings rate has been a better guide to wage pressures in recent years. Average earnings growth switched from a falling to rising trend in 2012 soon after the openings rate crossed above its historical average. The Kansas City Fed activity measure, by contrast, was 1.4 standard deviations below average in 2012. Nominal earnings expansion was above 4% in 2006-07 when the openings rate was last at the current level.
Faster earnings growth may contribute to the FOMC adopting less dovish language in its policy statement next week, supporting expectations of an interest rate increase in early 2015.
