Wage increases seem to be slowing after more than a year of strong gains

The pace of wage increases in this economy seems to be slowing down. On Wednesday, payroll processor ADP reported that pay growth for private-sector workers decelerated in March for workers who stayed in their jobs and those who quit to take new ones.

Economists are expecting a similar story in Friday’s jobs report. The consensus is that hourly earnings rose in March at a 4.3% annual rate, which would be a bit less than in February and well below last year’s peak of near 6%.

In general, this slowdown in pay gains is something the Federal Reserve will welcome in its efforts to tamp down price inflation. But rising wages are the very thing helping workers keep up with rising prices. 

What level of wage growth does the Fed want right now? 

The goal for price inflation is around 2%. The standard formula for target wage growth, said Elise Gould at the Economic Policy Institute, is that you add “long-term productivity growth — that’s about 1.5%,” she said. “So anything in the 3.5 range is certainly not going to be driving inflation.”

Some workers have been getting much bigger raises recently. Gould’s been crunching the numbers for the lowest-paid 10% of workers, many of whom are service workers who’ve been in high demand for the past couple of years.

“Those lower-wage workers saw faster wage growth, about 9% between 2019 and 2022 — much faster than at the middle of the wage distribution,” she said.

As wage growth slows, it’s likely to hit workers up and down the income ladder. But even many workers who get raises are likely to lose ground as the economy slows. 

“People are working less overtime, working fewer shifts per week,” said Dave Gilbertson at payroll processor UKG (a Marketplace underwriter), who tracks how many hourly workers punch in and for how long.

Employers are facing slackening demand, higher interest rates and economic uncertainty, Gilbertson added.

“Companies are broadly trying to manage their labor spend, recognizing that there have been elevated wages over the last couple years now,” he said. “One way to manage is to allow fewer hours for workers. Over a couple of months, I think employees are going to be in a tighter spot financially.”

Less money in people’s paychecks will tend to help the Fed fight inflation — hopefully without making consumers pull back so much it tips the economy into recession.