On average, however, labour markets across the rich world are clearly getting tighter. America’s is plainly overheating.
In March average hourly earnings were 5.6% higher than a year earlier, on the headline measure. Another gauge suggests that the lowest-paid are seeing bigger rises.
Goldman Sachs, a bank, produces a wage tracker that corrects for various pandemic-related distortions. It is more than 5% higher than a year ago, the fastest rate of increase since the data began in the 1980s.
Almost all wage measures in America show unusually rapid growth (by comparison, manufacturing wages rose by an annual average of 4.1% in 1960-2019).
Before the pandemic, underlying French wage growth was in the region of 1-2% a year. Now it is close to 3%. Italy looks similar.
On March 23rd Norway’s central bank noted that “wage inflation has been higher than projected, and wage expectations have risen.” Britain is particularly striking.
On Goldman’s measure, underlying pay there is rising at an annual rate of about 5%. Surveys of businesses suggest that even faster growth over the coming year cannot be ruled out.
Across the g10 large economies as a whole wages are rising by at least 4% a year.
Is this sustainable? To most people wage growth of 4% hardly sounds malign. But the arithmetic is inescapable.
At 4% wage growth, labour productivity (ie, the value of what workers produce per hour) must grow by at least 2% a year in order to be consistent with an inflation target of 2%.
Businesses would pass on half their extra hourly wage costs to customers in the form of higher prices, but would absorb the other half since they would be selling more goods and services, or producing them more efficiently.
Productivity growth of 2% a year is not unachievable, but it would be a lot stronger than it was before the pandemic.
Although productivity growth does seem faster than normal, our analysis of data from oecd countries suggests that it falls short of 2%.
It may yet rise as companies reap the gains from their large investments in remote-working technologies and digitisation.
Hopes of higher productivity, however, must be weighed against fears of still-higher wage growth.
If heady wage growth cannot be sustained, how might it fall? One long-floated possibility in those countries with lagging overall employment rates is that people who have left the workforce return, boosting the supply of labour.
Fear of covid-19 might eventually fade and child care might become easier to find, easing worker shortages and causing wage growth to fall.
This hope is receding, however. Although many Americans have returned to the workforce over the past six months, wage growth has not slowed—in fact, it has accelerated.
The Economist calculates that in September there were nearly 1.9m “missing” workers aged 25 to 54, based on participation rates in January 2020 and adjusting for population growth.
By March 2022 this had fallen by more than half to about 750,000—or less than two months’ worth of job growth at the recent pace.
There are another 1.3m missing older workers, but most are over 65 and likely to have retired permanently (and the number of missing over-65s has been growing).
It is likely, therefore, that in America and elsewhere labour markets will have to be cooled the old-fashioned way: by central banks raising interest rates, making it a little more attractive to save than spend and choking off demand for labour.
The Fed has already increased rates by 0.25 percentage points, and is expected to do so by a total of 2.5 points this year.
America may prove an example of what happens when policymakers respond to a labour market that has become dangerously hot.