The big news in the US Labor Department's April jobs report was that average hourly earnings only increased by 0.3 percent, bringing the annualized rate of growth—once adjusted for compositional changes in the labor force—to 3.8 percent over the past three months. This pace is considerably slower than in 2021 and may indicate that the US labor market is cooling down, which could ease some inflation.
The annualized three-month change in private sector earnings has fallen below 4 percent for the first time since March 2021. To the extent that wage increases would pass through to inflation, slower wage growth should ease some of the upward pressure on prices. Slower wage growth will do nothing, however, to end the supply-side drivers of inflation like the ongoing trade bottlenecks caused by the pandemic and the Russian invasion of Ukraine.
The downside of slower wage growth is that prices are currently rising faster than wages. Once adjusted for inflation, wages are falling faster than at any time in at least 40 years and are now near or below their pre-pandemic levels according to multiple measures.
The question going forward is whether continued reductions in unemployment can be sustained if wage and price increases do not slow dramatically. The Federal Reserve is raising interest rates to more normal levels, but what happens next depends on whether the labor market starts to cool on its own.
This PIIE Chart is adapted from Jason Furman and Wilson Powell III's blog, The US labor market could be cooling down.