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Big raises may be coming back down to earth

A ‘help wanted’ sign is posted in front of restaurant on Feb. 4, 2022 in Los Angeles.

Frederic J. Brown | AFP | Getty Images

The big raises that many Americans got over the past year are starting to get smaller.

Workers in the private sector saw average wages grow by 5.1% in the past year, to $31.58 an hour, according to the February jobs report issued Friday by the U.S. Department of Labor. Rank-and-file workers saw a higher bump, of 6.7%, to $26.94 an hour in February.

Employers have paid bigger paychecks to compete for workers in a competitive hiring market.

While February’s annual wage growth is high by historical standards, there are signs that it’s tempering. Hourly earnings for all workers rose by just 1 cent (or, by 0.03%) last month relative to January, a weak gain relative to prior months.

“What we’re seeing is the sign that, in aggregate, wage growth is slowing down a little bit,” said Nick Bunker, economic research director for North America at the Indeed Hiring Lab.

For context, workers had gotten roughly 3.5% annual raises prepandemic, which at the time was considered robust, Bunker said.

“Even if wages don’t continue to accelerate, but they’re 4% or 5%, that’s still quite strong,” he said. But it wouldn’t be the same “gangbusters” growth from early 2021, he said.

Demand for workers

Workers enjoyed greater bargaining power as the U.S. economy started emerging from its pandemic hibernation.

Employers’ demand for workers rose at the same time that Covid-related factors (like health fears, child care duties, early retirements and a bigger cash buffer) were limiting their supply.

Job openings surged to record levels. Businesses raised pay to attract scarce talent. Workers started quitting their jobs at record levels, many enticed by higher pay elsewhere, part of a trend dubbed the “Great Resignation.”

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However, workers are reentering the labor force, increasing their availability and making it easier for employers to hire. Wages, in turn, may come down, and workers may lose some of their bargaining power.

The labor force grew by 304,000 people in February, according to the Labor Department. (It remains 592,000 people shy of its February 2020 level.) The U.S. economy added 678,000 new jobs in February, the most since July and a continuation of recent strong growth.

Better pay is attracting workers off the sidelines, Bunker said. Jobs, especially in-person ones, may also be more palatable as risks posed by the Covid omicron virus variant recede.

Inflation

Despite higher pay, average wages haven’t kept pace with inflation. Consumer prices rose by 7.5% in January relative to a year earlier, a 40-year high. Annual inflation outstripped February’s 5.1% average pay increase.

When a household’s wages rise at a slower pace than inflation, it means they have less purchasing power. Their paychecks don’t go as far at the grocery store and at the gas pump, for example.

“Will inflation similarly slow down, and will it slow at the same pace or more?” Bunker asked of consumer prices relative to average wage growth.

The Federal Reserve is expected to start raising interest rates this month to cool down the economy and reduce inflation.

Workers’ raises have been much stronger than average in certain sectors of the economy, especially lower-paying, in-person jobs.

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