Slowing wage growth suggests the labor market is coming into balance

Average hourly earnings in January were 3.7% higher than they were the same time a year ago, according to the latest jobs report. That’s the weakest 12-month increase in about a year and a half.

Wage growth has been slowing down ever since 2022. The biggest reason? The labor market is softer than it was a few years ago.

“It’s a little bit softer in terms of the unemployment rate being a little bit higher. It’s a lot softer, in terms of the number of people being hired each month,” said Tim Duy, chief U.S. economist at SGH Macro Advisors.

He said even though there’s less demand for labor, the supply has been shrinking, too. Thanks in large part to the Trump administration’s crackdown on immigration.

As a result, Duy said, labor supply and demand have been coming into balance.

“Maybe not a perfect balance right now, maybe a little bit on the weaker side, but enough of a balance that it’s hard to get a lot of downward pressure on earnings right now,” he said.

Wage growth has been starting to stabilize.

Kathy Bostjancic, chief economist at Nationwide, said over the last year or so, “we have seen average hourly earnings, or wage growth, kind of hover between 3.7 and, say, 4%.”

How much wage growth workers are seeing depends on what industry they’re in, said Bill Adams, chief economist at Comerica Bank.

“Parts of the economy that are getting affected more by immigration restrictions, like the hospitality industry, are seeing faster wage growth as a result,” he said.

Overall, a stable pace of wage growth should support consumer spending this year.

Immigration restrictions are holding back the supply of labor and putting upward pressure on wages, Duy said, but that doesn’t mean Trump’s crackdown has created the ideal conditions for wage growth.

“We also know that when we have more immigration, the labor market was growing faster. And so when the labor market’s growing faster, generally we think consumer spending’s going to be faster,” he said.

Instead, the labor force has been growing more slowly. And that limits how much income is being earned overall, said Nicole Cervi, an economist at Wells Fargo.

“Even if you have a strong wage growth, your aggregate income growth is slower, and that will lead to, likely, a softer pace of consumer spending growth,” she said.

Cervi said that could start to play out in the coming months.