By now, you’ve probably heard about the “Great Resignation,” which describes the hordes of workers who’ve quit their jobs in the past year. As the U.S. economy continues recovery from the depths of pandemic mayhem, many labor market participants have decided to take their chances on self-employment, career pivot or even total lifestyle reinvention. And there’s a correlated benefit to those workers who remain in or return to the workforce. Wage and salary growth have finally surpassed core inflation by a significant margin. After nearly a decade of meager wage growth relative to annual price increases to goods and services, the Great Wage Catch-Up provides a much-needed pandemic-era silver lining.
One of the more significant benefits of upward price pressure on hourly wages and salaries is that both federal and municipal governments can now focus their fiscal policymaking elsewhere. Instead of pursuing federally mandated minimum wages for example, which could negatively impact local economies in varying degrees across disparate urban and suburban areas, legislators can now direct their attention to critical areas of broad economic development. These areas (specific to national and regional infrastructure upgrades) cannot be funded privately, as they are public use. Such an opportunity to do so is made possible by this once-in-a-generation favorable labor market dynamic.
Between December 31, 2006, and December 31, 2018 (according to data from the U.S. Bureau of Labor Statistics and Bureau of Economic Analysis), wages and salaries from private industries increased at an annualized rate of 3.29%. (Note: All data referenced in this article was sourced through my professional YCharts subscription.) During the same period, U.S. core consumer price index (a decent measure of the cost of goods and services in the economy) increased at an annualized rate of 1.87%. This netted a rather lackluster 1.42% annualized real (or after-inflation) wage growth, or about a 23% raise over 12 years.
During the Great Wage Catch-Up (December 31, 2018, to November 30, 2021), wages increased an annualized 6.17% while core CPI grew at an annualized 2.99%. Cumulatively over the past almost three years, prices increased 8.98%, but wages were up 19.08%, netting 10.1% of real wage growth. Remarkably, almost half the total real wage increase that occurred over the prior 12-year period was achieved in less than a quarter of the time — in the past three years. Such big moves have both positive and negative economic impacts.
The positive is many people are finally making more money for the work they do. The negative is consumer prices will continue to remain elevated for as long as it takes for workers to return to the workforce. This could manifest after newly self-employed ventures fail or simply run out of money to subsidize their ongoing effort. At that point, the labor market would welcome increased worker supply with slightly lower costs. A large portion of those who exited the workforce elected early retirement and aren’t looking to ever return. Many others will opt for staying home and raising children or other life pursuits. These factors could mean a full reversal of the “catch-up” would be unlikely. And that’s a good thing.
The good news behind all this could be that market interest rates, and the fixed income instruments they’re based upon, could finally return to levels more akin to “normalcy.” Although, the past 20-year historical average on A-rated corporate bonds is 4.21%, today they’re at around 2.11%. Expect intense market volatility, as we make our way back to average.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. CRN202501-1544467
