Friday, January 19, 2018

Merrill: "Are the stars aligning for wage growth?"

by Bill McBride on 1/19/2018 09:49:00 AM

A few excerpts from an article by Merrill Lynch economist Joseph Song: Are the stars aligning for wage growth?

One of the puzzles and disappointments of 2017 was the lack of better wage growth. Average hourly earnings started the year growing around 2.5% yoy but ended the year where it started, despite the unemployment rate falling 0.6pp over the course of the year. While we have yet to receive the 4Q reading for ECI, the same story played out through the first three quarters.

There is growing optimism that 2018 will tell a different story. With the passage of the Tax Cuts and Jobs Act, major corporations are doling out one-time bonus checks and announcing pay raises for many of its hourly workers. Plus, some minimum wage workers will see a bigger paycheck as several states and local municipalities raised their minimum wage laws on January 1st. We argue that these factors will underpin wage growth at the start of the year. Thereafter, we should expect a continued gradual trend higher in wage growth as the unemployment rate falls further.
...
Wage increases by companies and higher state and local minimum wages should provide a slight bump to wage growth in the next few months. ... Once the initial boost to wage growth fades, we think the trajectory for wage growth should be a function of the degree of tightening in the labor market. The descent in the unemployment rate should be able to boost wages to a high-2% pace by year-end and to 3% by the middle of 2019.
CR note: Mostly due to the tightening labor market, I'm also expecting to see more wage growth this year.