The Labor Department’s latest employment cost index — the quarterly report on how much employers are paying their employees — found that wages rose 1% in the fourth quarter, which is less than they rose in the second and third quarters.
The report, released Tuesday, lands as the Federal Reserve is meeting to decide how much it should raise interest rates in order to cool down inflation. The Fed will be keeping an eye on these wage numbers because the central bank’s been worried that wages have been rising too quickly.
“The idea is that rapid wage growth will feed into higher inflation, basically become something of a self-sustaining process,” said Tim Duy, an economics professor at the University of Oregon.
As wage growth slows down, he said the Fed might not feel the need to keep hiking interest rates as much as it has been.
“If you have another quarter like this, I think the Fed will take more hope that they have interest rates in the right place to really restore, what they would say, price stability or 2% inflation,” Duy said.
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More interest rate hikes run the risk of raising unemployment and pushing the economy into a recession, said Preston Mui, senior economist with the advocacy group Employ America.
“What we’re seeing is that it’s possible to bring down wage growth even without increasing unemployment,” he said.
Even though the unemployment rate is still low, Mui said the rate at which people are quitting their jobs has fallen; so has the hiring rate.
“It’s probably the case that people are moving less to other jobs,” he said. “And that slowdown in the labor market manifests through slower wage growth without higher unemployment.”
Slower wage growth on its own isn’t great for workers. But inflation has also been slowing down at a faster rate, said Elise Gould, senior economist at the Economic Policy Institute.
“When that happens, then real wages rise,” she said. “And that’s what we want to be shooting for.”
The workers who’ve benefited the most from wage gains have been low-income workers in historically marginalized groups, Gould added.
“We want that to continue. We don’t want there to be an unnecessary recession. That’s going to disproportionately hurt Black and Hispanic workers, young workers, workers with a high school degree.”
That’s another reason why the Federal Reserve should avoid raising rates too much this year, Gould said.