Wage growth in the American economy remains higher than average, but it is decelerating.
These wage dynamics will be a focus for the Federal Open Market Committee at its meeting today when it announces what will most likely be a 25 basis-point reduction in its policy rate.
After peaking at 6.5% in early 2023, yearly wage growth for full-time workers declined to 4.3% by August this year. The tightness in the labor market since the pandemic has been replaced by lower demand for workers coinciding with a drop in the supply of labor.
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As inflation appears to be settling into a long-term increase at or above 3% with the consumer price index advancing at a 3.6% pace over the past 90 days, American households will increasingly be squeezed as the cost of living rises and wage growth moderates.
The demand for part-time workers better exemplifies the growing slack in the labor market, dropping from wage increases of 5.8% per year during the recovery from the pandemic to 3.5% this past August. Clearly, full-time workers are more important to the workforce than the more casual part-time employees.
Wage growth over the years
The economy and the labor market weathered three existential crises over the past 25 years.
- Dot-com bust: The shallow 2001 recession following the dot.com bust and the 9-11 attack were followed by three years of decelerating wages.
- Financial crisis: The near depression of the 2008 financial crisis was followed by austerity, a slow recovery and a significant drop in wage growth. Below-average wage growth was the product of higher-paying manufacturing occupations being replaced by lower-paying service-sector jobs.
- Pandemic: The restructuring of the U.S. labor market in the wake of the 2020 pandemic resulted in a decrease in the labor supply and a significant increase in wage growth that now looks to be moderating.
The takeaway
This year will most likely prove to be another turning point for the labor market. The economy will need to adjust to the impact of tariffs, while the labor market adjusts to the diminished supply of workers as restrictive immigration policies take hold and as technological advances result in a diminished demand for labor.
