U.S. wage growth has been one of the most highly scrutinized economic trends recently. Investors watch average hourly earnings and employment cost data to gauge inflationary pressures, as wages represent up to 70% of business costs, and the Federal Reserve’s (Fed) dual mandate includes achieving stable prices.
So far, wage growth has been contained, but recent reports show wage pressures are rising. The October jobs report showed average hourly earnings grew at a 3.1% pace year over year, the first time annual growth has eclipsed 3% since April 2009. Employment Cost Index (ECI) data for the third quarter confirmed that compensation costs are growing at their fastest pace of the cycle [Figure 1].