COMMENTARY ON TODAY’S U.S. BUREAU OF LABOR STATISTICS EMPLOYMENT COST INDEX

The Employment Cost Index report showed that compensation growth for private industry workers slowed in Q1 2023 to 4.8 percent growth over the past year, from 5.1 percent in Q4 2022. However, it remains elevated compared to prepandemic growth rates of 2-3 percent and it has not cooled much over the last few quarters. The drop in compensation growth was mostly driven by weaker growth in benefits, which fell and now stands at 4.3 percent, from 4.8 percent in Q4 2022. Wage growth for private industry workers remained at 5.1 percent year-over-year, but it has fallen from its high of 5.7 percent in Q2 2022.

Slowing compensation growth was expected as the labor market has become somewhat less tight compared to a year ago. However, with job openings and quits still high, and the unemployment rate historically low, it is not surprising that wage growth remains strong. Continued elevated wage growth will make it harder to bring down inflation.

Wages for services workers (e.g., food services, cleaning, personal care) are still rising the fastest (6.4 percent over the past year), although they have come down considerably from their peak in Q1 2022 (8.6 percent). In other job groups wage growth remains elevated (see chart). Transportation and production worker wages grew by 5.1 percent over the past year, after reaching 6.3. percent a year ago in Q1 2022. For sales and office workers, wage growth has not changed much over the past year and stands at 5.9 percent in Q1 2023. For construction, natural resource, and maintenance workers wage growth ticked up to 4.8 percent (from 4.6 percent in the previous quarter). Wage gains for management and professional workers are the slowest among these job groups, but at 4.3 percent, also for these workers wages are rising well above prepandemic rates.

Wage growth may decelerate over the coming quarters. The labor market is expected to report slower job gains over the next months and in the second half of 2023, monthly job losses may even start. With the Federal Reserve rapidly raising interest rates, the labor market is expected to experience a more profound and negative impact from rising borrowing costs and slower consumer spending. However, with the unemployment rate projected to rise to only 4.5 percent, some pockets of the economy will continue to experience recruitment and retention difficulties, most likely in in-person services industries. This will keep pressure on wage growth. Indeed, 81 percent of CEOs expect to increase wages by 3 percent or more over the next year according to the Q1 2023 results of The Conference Board Measure of CEO Confidence™. Wage growth may not normalize to 2-3 percent until inflation returns to its 2 percent target which may not be reached until the end of 2024. However, with ongoing labor and skills shortages, wages may rise faster in some parts of the economy.