The Phillips Curve (the relationship between wages and the unemployment rate) finally awoke from its slumber with today’s unemployment report showing private sector wages rising 2.9% year-over-year and non-supervisory wages rising 2.8% year-over-year, the fastest growth rate since 2009. Even more important than that, though, is that all indications continue to point to even faster wage growth in the months and quarters ahead. Below are five important indicators, some with a leading relationship with wages, that all suggest faster wage growth, and an even tighter labor market is in the offing.
The output gap. The output gap is the difference between actual economic growth and longer-term potential growth of an economy. A positive output gap, like we have now, indicates the economy is growing faster than can be sustained without inducing pricing and wage pressures. The output gap leads wage growth by about six quarters and suggests wage growth in the mid-3% range in the near future.
Small business hiring plans. Small business hiring is normally the driver of aggregate employment and small businesses are telling us they plan to add employees within the next three months. This type of behavior is normally positive for wages, ditto when the unemployment rate is 3.9% and those small businesses have to complete for workers. Small business hiring plans lead wage growth by 15 months and also suggest wage growth in the mid-3% range.