Wage Growth Slowed. Could That Be Good News?

That's the annual rate of wage growth in May—a big drop off from the recent peak of 7.9% in October, but actually a positive sign for avoiding more inflation and a recession.

If wages continue to go up more slowly, it could be just the ticket for putting the job market on a path to sustainable long-term job creation rather than a boom-and-bust cycle. While a slowdown in wage growth may be discouraging to people whose pay raises have generally not been keeping up with price increases, wage growth that is too fast contributes to inflation and can wind up sending the economy into a tailspin.

The cooling off of wage growth was evident in an analysis of data by Jason Furman, a Harvard professor of economics and former top economic advisor to President Barack Obama. (Furman compiled the figures using data from Friday’s government report on job creation, but adjusted it so it wouldn’t be distorted by how many jobs were gained and lost in various high and low-paying industries.)

“Wage growth is moderating a little bit but it's also still very high,” said Nick Bunker, economic research director for North America at the Indeed Hiring Lab. “It’s consistent with a sustainable moderation rather than a significant downturn.”

The Federal Reserve is in the midst of a campaign to quash inflation by raising its benchmark interest rate, a tactic designed to increase the cost of loans throughout the economy, discouraging borrowing and spending to rebalance supply and demand. This method risks slowing the economy too much and causing a recession. 

So where does wage growth fit in? If companies have higher payroll costs because they have to pay their workers more, they are likely to pass on that burden to the consumer by raising prices, fueling inflation. So the Fed might react to economic reports of rapid wage growth by hiking interest rates aggressively, increasing the chance of a recession, Bunker said. 

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