Wage Growth at Record High

The artificial economic shutdown in 2020 and its aftermath so far in 2021 have seen the highest growth in private-sector weekly wages on record. The Bureau of Labor Statistics does not publish adequate data further back than March 2006, but this 15-year period still offers a compelling context for the past year’s wage inflation.

Given that this has happened during an artificial economic shutdown, and not a regular recession, it is highly unlikely that there will be any productivity gains to match this wage growth. If the economy were experiencing such productivity gains, there would be little reason for the recent spike in the Producer Price Index, which rose by six percent in February. This is the highest increase since 2011.

As we explained in last week’s Economic Newsletter, the PPI generally transmits to consumer price inflation with a 2-3 month lag. In other words, the recent increase in wages is likely to transmit all the way to consumer prices.

Before we get to the monthly wage-inflation numbers, Figure 1 reports the annual average increase in per-employee private-sector wages as far back as BLS data permits:

Figure 1

Source of raw data: Bureau of Labor Statistics

We see the tail end of the Bush-era growth period, with 2008 per-employee weekly wages increasing at 2.76 percent; the trough of the Great Recession in 2009 and the modest-pace Obama recovery 2010-2016, during which private-sector wages increased at less than 2.4 percent per year, on average. The Trump economy, by contrast, came with a productivity-induced rise in wages noticeably higher than in the previous ten years.

The artificial economic shutdown in 2020 stands out, and drastically, with its almost 5.2 percent increase in the per-employee weekly wage. In fact, the shutdown is responsible for the seven highest monthly increases of all the 168 months for which BLS data is available. The numbers are telling…

Figure 2

Source of raw data: Bureau of Labor Statistics

…especially when compared to its individual components:

  • The number of employees was, on average, 6.25 percent lower in 2020 than in 2019, with the margin shrinking to -6.01 percent in February 2021;
  • The number of hours worked per employee in 2020 remained almost identical to 2019, 34.5 compared to 34.4, with January and February 2021 standing at 34.6 and 34.3 hours, respectively.

In other words, there is no inflation pressure on wages from employment or the weekly work week. In fact, the total private-sector weekly wage bill stood at $124.1 billion in February 2021, down from $126.7 billion a year earlier.

The inflation pressure instead comes from the individual hourly wage, which increased at 4.86 percent on average in 2020. This is the highest number extractable from the BLS raw data. The rapid increase continues through January (5.22 percent) and February (4.55), again record-topping numbers.

High growth rates in per-employee wages while unemployment is at the current levels, is by definition a situation of stagflation. Unlike the stagflation we experienced 40 years ago, this one is caused not by external inflation pressures, but by an internal, regulatory incursion into the economy. The one similarity is monetary policy, which was expansionary under the Volcker Federal Reserve era. It is even more so now, and the added danger in terms of inflation is that we now have a fiscal policy that is geared toward monetized deficit spending.

In short: we continue to see a trend of inflation in the U.S. economy, something we have been warning about the threat of inflation since September last year. The upward pressure on wages tapered of somewhat in February, but not enough to ease our worries. In fact, the total weekly wage, per employee, increased by 4.24 percent last month, the second-highest February number on record. The only number higher than that was February 2020, the last month of the Trump growth period. At that time, wages were growing as a result of productivity gains, not artificial shortage of labor.