Macro – Is there any wage inflation?

Bottom Line

Current consumer price inflation has not been fed by wage pressure but rather by the spike in aggregate demand deriving from government aids, as shown in real disposable income. Real wages are decreasing, except in specific sectors dominated by low-skilled labor and low wages. Moreover, we observe that sectors with wage inflation are not the same sectors showing consumer price inflation, suggesting the wage-price inflation spiral remains muted.

The shortage of workers remains the primary concern. If cyclical, no significant wage pressures should be expected, but if structural, we might observe wage pressure build-up over the coming months. However, as was the case for the past decades, automation should cap any real wage pressure. Thus, the fear of a large-scale wage-price inflation spiral should, for now, be discounted.

State Of Wage Inflation

Common wage inflation measures are misleading

There are many ways to measure wage inflation. The common one is Average Hourly Earnings. This measure is misleading and needs to be interpreted on a case-by-case basis. It does not provide the full picture and can lead to incorrect conclusions.

  • Better measures should target the total amount spent as salaries by companies or the actual income of individuals, considering all sources of revenues.

Real income is back to its trend

Real income is now back in line with its multi-decades trend. Thus, it is not overshooting and does not pose any risk to consumer price inflation from the demand side.

  • Currently, the usual relationship between price inflation and wage inflation is by and large absent. This can be explained mainly through globalization and automation.

Automation and Universal Basic Income

Automation is changing the means of production and thus the relationships between work, earnings, and production. The Covid-19 crisis accelerated the pervasiveness of automation and how it is reshaping society, notably by reviving the idea of a Universal Basic Income (UBI).

  • The theory behind UBI can be traced back to the Enlightenment with Thomas Paine and others. Recently, Covid-related state aids implicitly started UBI at a large and meaningful scale.

Average Hourly Earnings

Importance of wage inflation

Central banks have a mandate on price stability. Their monetary policies are thus contingent on inflation. An important potential driver of inflation is wage inflation.

  • Wage inflation increases the cost of production and the purchasing power of consumers, directly impacting consumer price inflation.
  • Contrary to food or energy prices, wage inflation is considered structural and, therefore, rightfully catches the attention of policymakers.

Average Hourly Earnings

In the U.S., the common measure of wage inflation is the Average Hourly Earnings (AHE), released monthly by the Bureau of Labor Statistics within their Job Report.

  • It is calculated as the ratio of Average Weekly Earnings to Average Weekly Hours.
  • AHE may be highly misleading because it can increase if people work less.
  • Also, AHE does not consider aggregate income since it is based only on the actual number of workers.

AHE during recession

AHE is, in fact, a flawed measure. For example, during a recession, the weekly hours decline faster than weekly wages, increasing AHE mechanically. Also, when the low-wage workers are fired, the average workers earn more: as a result, AHE increases.

  • During the Covid recession, average weekly hours declined, and many low-wage workers were fired (e.g., hospitality). Therefore, AHE increased massively.
  • As such, AHE is difficult to interpret, and central banks should not tighten monetary policy simply based on AHE.
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Alternative Measures Of Wage Inflation

Better measures of wage inflation

An alternative way to measure actual wage inflation could be based on weekly earnings multiplied by the actual number of workers, thus measuring the aggregate dollar amount given to employees. This is shown in the top-right chart.

  • We observe a decline during recessions, as one should expect.
  • This alternative measure shows wages are back to their pre-Covid-19 trendline.
  • Moreover, as the above measure is not deflated for inflation (CPI), real wage growth is actually below its trendline.

Real Disposable Income

To compensate for the above-mentioned measure’s shortcomings, the alternative is to refer to the Real Disposable Income per Capita (RDI). Published by the U.S. Bureau of Economic Analysis, it includes every type of income, not only wages.

  • RDI has massively increased during the Covid-19 crisis due to government aids. This measure of income growth partly explains the goods’ inflation in the wake of the post-pandemic reopening.
  • However, RDI does not measure if and how wage inflation affects the production cost for enterprises (labor costs).

Employment Cost Index (ECI)

The ECI measures the cost of labor and includes wages and salaries along with other benefits such as healthcare. It should be used with the RDI indicator to have an exhaustive picture of the actual wage inflation situation.

  • Last ECI data shows an increase of 4% YoY and 1% QoQ, with the bulk of the increase in the healthcare sector. 
  • Deflated by current inflation, ECI shows real employment cost decreased.
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Where Does The Nominal Increase Come From?

Wage growth remains below inflation

Wage growth is not following the high levels of inflation. While it increased by some measures, consumers’ purchasing power has been dented by inflation.

  • Real wage growth, as evidenced by various measures, is negative.
  • The wage increases mainly took place for low-skilled jobs.

Wage growth is not uniform

The Fed of Atlanta provides interesting data on wage growth. It suggests that the primary beneficiaries of the nominal salary increases have been the low wages, job switchers, women, and younger employees.

  • These categories were also the most affected by the pandemic’s closures.
  • The rebound in wages is necessary and in line with the reopening of the economy, but not enough to keep up with the increase in living costs.

Low wages are still below living wages

Studies showed that, even after raising the low wage during the pandemic, the latter is still below the living wage (circa $17.7/hour according to MIT calculations), preventing low-wage workers from becoming a driving force of aggregate demand.

  • People are less incentivized to go back into the workforce if they cannot earn a living. It thus creates a shortage of workers, reflected in the high JOLTS number.
  • Without proper wage increase, the workforce is diminishing, creating a shortage of low-skilled jobs.
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Price Inflation And Wage Inflation

The relation between price and wage inflation

An inflationary shock can be amplified by a strong labor market, with a price-wage inflation spiral (like in the ‘70s) which is the concern of policymakers.

  • Companies would pass the higher wage costs to consumers by hiking prices.
  • A tight labor market allows workers to ask for a raise to keep up with inflation.

Price and wage growth are in different sectors

There is currently little evidence that the labor market is amplifying price inflation. Indeed, price and wage inflation is not happening in the same industries. Price inflation appears not to be coming from a shortage of workers or a tight labor market. As we wrote in mid-january, inflation is mainly coming from Covid-19-related supply chain disruption.

  • In industries with price inflation (e.g., used cars), we do not observe wage growth, while in sectors with wage growth (e.g., hospitality), we do not observe price inflation.

Price inflation and labor costs

Before the ‘90s, changes in non-labor costs were followed by a change in labor costs, i.e., wages responded to price inflation, amplifying the price-wage spiral inflation. But since the ‘90s, this link appears to have essentially been broken, as wages are not increasing upon rises in non-labor costs.

  • Among the possible reasons, globalization and automation are the most relevant.
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What Is Capping Wage Inflation?

Globalization and wage inflation

The labor share, i.e., the portion of national income that goes to workers, has declined for the past decades. Globalization and the ensuing offshoring of manufacturing have probably played an essential role in this decline.

  • With low-skilled jobs being exported, workers have lost the wage competition.
  • Re-onshoring some businesses following the Covid-19 supply chain crisis can help sustain or increase wages in niche sectors.

Automation and wage inflation

Automation also has a role in the decline of labor share. By increasing productivity, automation weakened workers’ bargaining power. Automation impacted mostly low wages but raising the minimum or low wage could end-up increasing automation at the expense of workers.

  • Studies suggest that only the threat of automation is sufficient to cap wages despite productivity gains.

Digital transformation

The digital transformation and the automation of work are only at the early innings. The development in computing components combined with the breakthroughs in A.I. are offering countless opportunities for better efficiency gains (and earning's growth as a direct consequence), and companies across all sectors are massively investing in automation technologies in response to inflation.
According to McKinsey, more than 67% of companies have accelerated their automation and A.I. capabilities, since the pandemic outbreak.

  • The impact on wages will likely exacerbate inequalities, increasing wages for high-skilled workers and probably no wage at all for the low-skilled ones.

Universal Basic Income

Digital transformation of the society

The digital transformation starting at the companies' level will eventually impact our relationship to work, earnings, and productivity.

  • The use of technology to keep working during the Covid-19 lockdowns has been the catalyst. This remote work experiment led many workers to rethink their relationship to work.
  • The current hype around the Metaverse is also a striking example of this change and might profoundly alter the relationship we have with work.

Covid-19 government aids

Thanks to the various government aids during the pandemic, people income increased as we observed in the RDI measure. Direct government aids, very unusual in the U.S., changed the relationship to the work and could have seeded the onset of Universal Basic Income.

  • Unemployed people did not actively go back to work and were not incentivized to do so. As real wages decreased, they preferred to stay at home on government benefits than to earn less than the living wage.

Universal Basic Income

To solve a societal issue in which many would not afford basic needs because of the lack of skills and jobs (possibly due to automation), the Universal Basic Income (UBI) might reemerge on the back of the Covid-19 crisis.

  • UBI needs to be universal, i.e., received by every citizen, irrespective of any other consideration, and basic, i.e., cover the basic needs.
  • Some pandemic-related government aids were the first UBI experience at the national level in many respects. We observed its effect on RDI and ensuing inflation.

Consequences On Monetary Policies

Difficulty in assessing the health of job markets

There are many indicators used to assess the health of the job markets. Currently, there are conflicting signals that make it difficult to correctly estimate the state of the workforce, especially during this pandemic-distorted period.

  • Last Friday, one of the most sought-after indicators, the Non-Fam Payroll (NFP), was released and significantly beat expectations (467k vs. 125k).
  • Two days earlier, the ADP report showed, on the contrary, a fall of 300k jobs.

Workers’ shortage: structural or cyclical?

Undoubtedly there are fewer workers now than before the pandemic. In fighting inflation, the main question is if this shortage is cyclical or structural.

  • From the pre-pandemic levels, NFP shows a shortage of 2.9m workers, backed by the drop in the employment-to-population ratio and the participation rate.
  • Cyclical shortage should cap wages with workers re-entering the workforce, while structural shortage increases the probability of wage-inflation pressure.

Full employment and inflation

Besides price stability, policymakers also have a mandate on full employment. Theory suggests that strong growth and full employment lead to wage inflation. The Fed, suggesting the economy reached full employment citing JOLTS numbers, decided to go on a full restrictive monetary policy to prevent wage inflation.

  • We currently do not observe meaningful wage inflation, but short-term wage inflation could become problematic if the shortage is structural.
  • At the same time, the pandemic boosted automation in many industries, potentially inhibiting further wage inflation.


  • Shortage is cyclical. A return of idle workers to the labor force will eventually ease any wage inflation pressures, hampering the Fed to go very restrictive.
  • More automation. If demand for workers is not met, a combination of automation and wage growth should likely happen. The former should replace some workers and cap any wage-price inflation spiral, as it did for the past decades. Moreover, the massive automation investments made during the pandemic will likely hamper wage inflation across all industries.
  • Normalizing economic growth. With a positive but normalizing growth and with RDI back to its trend, the aggregate demand is likely slowing. Thus, the need for workers should also decline, hindering wage inflation.


  • Shortage is structural. If Covid-19 effectively reshuffled the workforce, and the U.S. economy is indeed in full employment, wage inflations may start to rise. This may lead to stagflation with less output and high inflation.
  • Tightening into a slowing economy. Many indicators are pointing to growth and inflation decelerating. Should the Fed fear a wage-price inflation spiral because of the workers’ shortage and become more restrictive than the economy can handle, a recession may follow.
  • Increase in RDI. More money available to be spent by consumers drives up the demand for workers and reduces the supply of workers as people are less in need of work.



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