Wage gains unexpectedly accelerated last month to the fastest pace in more than eight years, signaling that average workers’ pay may finally be breaking out of a long period of weakness, according to a report Friday that also showed hiring continued at a solid pace.
Nationwide, average hourly earnings for all private-sector workers in January were up 2.9% from January 2017, the largest year-over-year percentage gain since June 2009, when the economy emerged from the Great Recession.
Analysts said the pickup in wages probably did not reflect the recent wave of announcements from companies that they planned to increase raises, thanks in part to the tax cuts that passed last year. Many more employers said they would be giving bonuses, but those one-time payouts would not affect average wages.
The upturn in earnings actually began late last year, the Labor Department’s revised data on Friday showed, reflecting the long economic expansion and tightening labor market.
The nation’s unemployment rate in January held steady at a 17-year low of 4.1% for the fourth straight month.
The sustained low unemployment and solid job growth — employers added 200,000 jobs last month — indicate that the U.S. economy is performing well and that companies are increasingly finding it difficult to hire workers. Layoffs are at very low levels, and for many businesses, attracting and retaining talented staff has become their top concern, according to the Conference Board, an employer-sponsored group.
In states like California, overall wages are rising thanks to a combination of a shrinking supply of workers, higher minimum wages and lower immigration, both legal and illegal, in industries such as construction, farming and health services, said Michael Bernick, a San Francisco employment lawyer and former head of the California Employment Development Department.
“Wages are going up in ways they haven’t before,” he said.
Nationwide, average hourly earnings for all private-sector workers last month rose a solid 9 cents, to $26.74, after an upwardly revised 11-cent increase in December. Workers in construction and most services, including finances, information and hotels and restaurants, saw sharper pay increases.
While good for workers, news of the faster-than-expected gain in wage inflation appeared to surprise financial markets — and not in a positive way. Stocks tumbled and long-term bond yields rose as investor worries set in that labor costs could be rising too fast, crimping corporate profits and leading to higher inflation and interest rates.
“There’s room for them to handle higher wages, but it’s the speed” of pay increases they’re nervous about, said Kathy Bostjancic, an economist at Oxford Economics. She added, however, that the market may be overreacting, as she foresees wage gains rising only moderately.
Policymakers at the Federal Reserve have been looking for wage pressures to build and give a lift to the unusually low inflation that has persisted over the last few years, and the latest jobs report could be a sign of higher prices and interest rates to come. The central bank held its benchmark interest rate steady earlier this week, but Friday’s report makes a rate hike in March highly probable.
Higher inflation will undercut real wage gains as workers pay more for goods and services; gas prices have been rising lately, and the weakening of the dollar also has made imports more expensive. In recent months, inflation has been running around 1.5%.
Brad Hershbein, an economist at the W.E. Upjohn Institute for Employment Research, says one key indicator of underlying wage pressures is what’s happening with average earnings of newly hired workers, as opposed to raises for existing employees. And by that measure, he said, wages are not heating up as the total average hourly pay might suggest.
It’s also not clear how many potential workers are out there. A greater percentage of people in their prime years are not working or looking for work today than in the past, and just how many of them have the skills or want to work is an open question. Employers may have to bid up wages to find out.
The addition of 200,000 workers to the nation’s payrolls last month exceeded most analysts’ forecast for job growth of about 175,000. The average monthly job growth for last year was 181,000; it was 195,000 in 2016.
January’s job gains were widespread, with construction, food services and healthcare industries leading the way. Manufacturing also continued a yearlong pattern of solid hiring, adding a net 15,000 new jobs last month. The stronger global economy has boosted exports and helped lift hiring at factories making machinery, transportation equipment and other products.
Most analysts are expecting the pace of job growth to slow this year but to remain well above the 80,000 to 100,000 range needed monthly to absorb new entrants to the labor market and keep the unemployment rate from rising.
Many experts expect the jobless rate to fall to below 4% this year, and that should benefit more groups of workers with historically high unemployment. In January, the jobless figure for blacks rose to 7.7% after falling to a record low of 6.8% in December, a level that prompted President Trump to frequently highlight the economic progress under his watch. The jobless rate for Latinos ticked up a notch to 5% in January.
Jobless rates for groups can be volatile, and last month’s figures included annual population adjustments by the Labor Department that make for difficult comparisons with the prior month.