Why US labour cost inflation is rising - at last

Tom Traill - 08 March 2018

While US Treasury Secretary Steven Mnuchin is technically correct in saying that wage inflation need not be mirrored in generalised price inflation, this can only be true if productivity improvements underlie divergent wage growth. Demonstrably, this is very unlikely to be the case for an economy with low unemployment rates, where the talent pool has been drained and large sections of the migrant population fear for their work and residency status. The Trump tax cuts, extensions in federal spending and threatened steel and aluminium tariffs will aggravate existing skill and physical labour shortages, bidding up wage rates in manufacturing industries and fueling inflation expectations in business and financial markets. 

The context of faster wage and employment cost growth in the US is not as a reward for enhanced productivity, but as a response to tight labour market conditions and mounting social and public health pressures. In 2012, it was announced that the Federal Reserve would start to look to raise interest rates when unemployment fell to 6.5 per cent. Instead, the Yellen Fed pursued a lower-for-longer rates policy, in a quest to eliminate ‘slack’ from the labour market. Currently, the U3 unemployment rate is at 4.1 per cent, lower than at any point in the lead up to the 2007-08 financial crisis and bettered in only a few months at the peak of the dot-com bubble in the past 40-odd years. Initial unemployment claims are lower than any point since the 1960s, and even longer ago, when adjusted for interim population growth.

A recent article from the US Conference Board showed that the market tightness is beginning to manifest in new ways, referring to survey evidence suggesting that it is now more difficult to hire qualified workers than it was in 2007. Alongside this they suggest “that in recent years, as the labour market has tightened, employers’ new hires became less educated.” A report from the American Trucking Association says that almost 900,000 more drivers are needed to meet rising demand. The agriculture industry is also facing labour shortages.

The opioid crisis is also having an impact, shrinking the available pool of labour available for work; opioid use in some areas is so prevalent that one-in-three people now fail a pre-employment drug test. Likewise, the US criminal justice system has delivered a high incidence of people hindered in their job search by their criminal records.

The campaign for a ‘living wage’ is also beginning to have material impacts on employment costs with around 15m low-paid workers enjoying minimum wage uplifts in 2018. In 6 states and 17 cities, the increases will eventually reach US$12 to US$15 per hour. The hourly minimum wage is already US$12 or higher in 13 cities, including New York City, Washington DC and many Californian cities.

The clear loser in this set-up is underlying corporate profitability. The acceleration of US employment costs (figure 1) has been a long time coming, the game is now on. Increasingly the evidence suggests that employers are going to have to pay more in order to attract the staff that they need.

Figure 1: 

Data source: Bureau of Labor Statistics              

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