Compensation growth for American workers is stuck in
neutral, suggesting the labor market has more slack than the relatively low
unemployment rate suggests. A gauge of compensation costs that takes into
account changes in worker productivity rose 2% in the third quarter from a year
earlier, the Labor Department said Thursday. The change in unit-labor costs is
the latest marker indicating little breakout in workers’ paychecks.
A measure of combined salaries and benefits, released last
week, also advanced 2% from a year earlier in the third quarter, and average
hourly earnings rose 2.2% on annual basis in September. The gains remain below
historical norms and indicate that workers’ pay is barely advancing despite a
5.1% unemployment rate in September, the lowest of the business cycle.
Economists expect October’s jobless rate, due Friday, will fall to 5%.
Weak productivity growth is one reason employers could be
reluctant to raise wages. If workers don’t become more efficient, businesses
may see little need to hand out raises. Productivity advanced at a 1.6%
seasonally adjusted annual pace in the third quarter. But from a year earlier,
business productivity improved just 0.4%.
The quarterly gain was largely driven by a decrease in hours
worked from July through September, helping to boost productivity despite a
lackluster advance in output.
The decline in hours worked surprised many economists. Data
from the September jobs report showed the number of hours Americans worked
increased during the third quarter. The hours-worked figure from the jobs
report comes from a slightly narrower group of workers. The September figure
also could be revised in Friday’s report.
In addition to measuring slack in the labor market, changes
in compensation have traditionally been viewed as an indicator of future
inflation. If firms don’t need to raise worker pay, they have leeway to keep
prices in check. Likewise, accelerating labor costs in the 1970s were seen as
primary driver of the high inflation experienced during that decade.
But Federal Reserve Chairwoman Janet Yellen earlier this
year questioned whether such a relationship between compensation and inflation
continues to exist. But even if the trend in compensation gains is locked at around
2%, that is well above the near flat change in consumer prices over the past
year. The gains are in line with the Fed’s 2% annual inflation target. The
readings suggest there is some scope for inflation to move back toward the
central bank’s target in the coming months. Many economists expect that to
happen as the influence of last year’s oil and fuel price declines fall out of
year-over-year measures.
The Fed is closely monitoring compensation and inflation
data as it considers whether to raise benchmark interest rates from near zero
at next month’s policy meeting. The data could influence not just when the
first move is made, but also how steeply rates will increase in the coming
years.
A separate Labor Department report Thursday showed jobless
claims increased by 16,000 during the week ended Oct. 31. That was the largest
one-week increase since late February. But the overall level of claims remains
low by historical standards, in territory that typically coincides with payroll
increases and suggests employers are reluctant to lay off workers.
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