Wage surge in hot US labour markets sends hopeful sign to Fed

Bloomberg

With Minneapolis-St. Paul’s health-care industry booming, scientist Erin Nelson fielded more than 20 unsolicited calls in the past year asking her to consider switching jobs. She took one in September at a 40 percent raise.
“Pay is becoming much more competitive,” said Nelson, 35, who designs research projects for medical-device companies. “It is a nice feeling to have job security, that there are jobs out there.”
While much of the U.S. seems trapped by tepid wage growth — fueling election-year anger among voters and keeping Federal Reserve policy on hold — Minneapolis-St. Paul has been doing quite nicely. The metro area generated 4.9 percent average wage and salary gains, Employment Cost Index figures from the Labor Department released Jan. 29 show. Cities including Nashville; Portland, Oregon; Seattle and Dallas also face worker shortages that’s pushed up pay.
That could be welcome news for the central bank, which expects lower U.S. unemployment to pressure wages and lift inflation that’s been under its 2 percent target since 2012. The extent to which hot local labor markets spread nationwide may determine how many times the Fed raises rates, after officials halved their forecast for the number of increases this year to just two.
Fed Chair Janet Yellen expressed disappointment with the weakness in the link between improving labor markets and wages on March 16, at a press conference after a meeting of the Federal Open Market Committee at which officials left interest rates unchanged to help spur price pressures.
“There is certainly scope for further increases in wages,” she told reporters. “The fact that we have not seen any broad-based pickup is one of the factors that suggests to me that there is continued slack.”
The so-called Phillips curve relationship between tightening labor markets and inflation is proving to be more powerful in metropolitan markets like Minneapolis. With the U.S. expansion approaching its seventh birthday in June, an increasing number of regional markets are battling to find workers.
The U.S. jobless rate is projected to have remained at 4.9 percent in March, according to a Bloomberg survey of economists ahead of Friday’s monthly employment report. The release will also contain the latest read on average hourly earnings, expected to rise 2.2 percent year-over-year. With few signs of wage pressure, the FOMC in March cut its estimate of long-run unemployment, the level consistent with stable inflation, to 4.8 percent from 4.9 percent.
Yet for most cities, the unemployment rate which represents full employment appears to be lower, around 4 to 4.5 percent, Goldman Sachs economists David Mericle and Daan Struyven wrote in a Jan. 22 report. Average inflation tends to rise quite gradually as unemployment declines, then accelerates as the jobless rate moves below 4 percent, they found.
Looking at 13 metro areas, Goldman estimated that each 1 percentage point drop in the unemployment rate results in a 0.3 point gain in inflation excluding food and energy prices.
“Wage growth is finally reviving,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “I believe the Phillips curve is alive and well” and the linkages in local markets is “very convincing.”
Some of the U.S.’s hottest labor markets are getting wage gains well in excess of the roughly 2 percent gains most Americans have been getting.
“We are seeing the talent shortage become a pressure point for wage inflation,” said Kip Wright, senior vice president at ManpowerGroup Inc., the Milwaukee-based staffing company. “As unemployment continues to fall, the availability of qualified resources continues to shrink.”