Wages Continue to Grow, Good for Workers but a Worry for the Fed

The wage growth rate remained high in early 2023. This is good news for workers who are trying to keep pace with rising costs of living. However, it will be a source of concern to Federal Reserve officials who want to curb inflation without creating a recession.

The Labor Department reported Friday that wages and salaries of private sector workers in the United States were up by 5.1 percent from a previous year and 1.2 percent compared to December. This was the same rate of growth as December and surprised forecasters who expected a slight slowdown. In the first quarter, a broader measure of compensation, which includes benefits and pay, showed a slight acceleration.

Since more than a month, the Fed has raised interest rates in an attempt to cool down the economy and reduce inflation. The Fed is a major player in this puzzle. They believe the labor market has pushed wages up at an unsustainable pace, which contributes to inflation. The policymakers are trying to find a balance between raising borrowing costs to deter hiring and to ease the pressure on wages, without increasing them so high that employers start mass-laying off employees.

These efforts have had mixed results. The inflation rate has dropped from the highs of last year and economic growth is slowing. Data released on Thursday revealed that, after adjusting for inflation, gross domestic product increased by only 1.1 percent annually in the first three months. The number of job openings has decreased, and sectors that were previously hot, such as housing and technology, have dramatically cooled.

The inflation rate has fallen more slowly than forecasters expected. Many economists believe that the labor market is no longer boiling, but it's still simmering at an uncomfortably hot temperature. The latest wage data released on Friday shows a similar trend: While wages are not increasing as quickly as they were in mid-last year, they are still growing much faster than prior to the pandemic.

The Fed was already expected to increase interest rates at its meeting next week. And the wage data that were released on Friday eliminated any doubts.

In a letter to clients, he said that if any Fed officials had been hesitant about a rate hike in May, "the wage data will likely push them to at least support one more hike."

The Fed is dealing with a sensitive issue when it comes to wage growth. The Fed is sensitive to wage growth. Most economists both inside and outside of the Fed say that wage growth is not the main cause of recent high inflation.

Fed officials are concerned that companies will have to raise prices if they want to continue raising wages. This could make it difficult for the inflation rate to return to its target of 2 percent per annum, even after the disruptions of the pandemic era that initially caused inflation to rise have subsided.