The American labor market starts showing some signs of overheating with a projected +3.0% to +3.5% increase in salaries this year
Tightening of job market conditions.
By many measures, the U.S. labor market is becoming very tight, and yet salaries and wages have grown at only very sluggish rates during the recovery (+2.2% y/y on average since 2010), barely outpacing historical averages or inflation. Since income provides the fuel for the spending which drives almost 70% of the US economy, wage and salary growth is critical to the increased economic activity expected in 2018. Our expectations are that salaries and wages are indeed likely to accelerate from 2.5% y/y in 2017 between 3% and 3.5% y/y in 2018 for several reasons
The first evidence of wage growth has already appeared in the January employment report which showed wages growing at 2.9% y/y, the fastest of the entire recovery.
In fact in the majority of industries, wages have grown faster than 2.9% over the past year. Only the sectors shown in red are underperforming relative to their historical relationship to overall wages (figure1), and we do expect the current strength in the manufacturing sector is likely to bring wages back towards their higher historical averages. That would leave only two sectors underperforming (trade-transport-utilities and wholesale sector).
The 2.9% y/y wage increase in turn helped boost inflationary expectations, which had already been rising since the middle of 2017, even further. And of course those inflationary expectations will contribute to further wage gains this year.
Wage pressures will also emanate from small businesses which are reporting aggressive hiring plans. Ac-cording to the National Federation of Independent Business (NFIB) survey, the net percentage of respond-ents who are “planning to expand employment” reached an 18 year high in January, while the net percent-age of those “planning to raise worker compensation” rose to the second highest level ever (since the survey began in 1986), and the highest in 28 years (figure 2).
Finally, the net percentage of firms with at least “one hard to fill job opening” reached a significantly high level of 33.7 compared to the long-term average of 21.5.
The effects of the recent tax plan are also having an unexpectedly positive result.
While it is true that much of the corporate tax cuts have gone to share buybacks and dividends, a large amount has gone into worker bonuses and wage increases.
Figure 1 January Hourly Wage Growth, y/y
Figure 2 NFIB Hiring Plans; % of firms planning to create new jobs
Over 400 companies including Apple, Boeing, JP Morgan, Wal-Mart, MasterCard, Visa, American Airlines, AT&T, Bank of America, Fiat Chrysler, Southwest Airlines, Wells Fargo, and Starbucks have either raised wages, paid bonuses, or both.
In addition, the new ability to expense investments immediately, combined with the repatriation of overseas profits will boost investment in both labor and equipment. Those investments should lead to higher productivity which typically drives wage increases. A less well-publicized change in laws may have an even more sizable effect: 18 states, including New York and California, raised their minimum wage as of January 1st.
Wages and salaries have yet to be driven up by the low unemployment rate, but that is about to change. Simply looking at the unemployment rate by itself does not tell the whole story. Instead there are two other measures related to the unemployment rate which are more predictive of wage increases.
First, the U-6 unemployment rate, which includes discouraged workers no longer looking for a job and those only marginally attached to the work force, shows a strong relationship with wage growth.
Clearly the U-6 is on a strong downward trend (Figure 3 shows the U-6 plotted inversely) and is expected to continue that trend in 2018, boosting median wages and salaries.
Figure 3 Wages vs ratio, job openings / unemployed