Compensation for American workers rose rapidly in the first quarter as a tight labor market put more money in workers’ pockets while maintaining inflationary pressures.
Businesses and government employers spent 4.5% more on labor costs in the first quarter compared to the same period last year, excluding seasonal adjustments, the Labor Department said on Friday. That was the fastest increase since 2001, and the fourth-quarter gain topped the annual growth of 4.0%.
Compensation of employees also accelerated on a quarterly basis, rising a seasonally adjusted 1.4% in the first quarter, compared with an increase of 1.0% in the fourth quarter. The growth reflected strengthening wages, salaries and benefits.
That has helped households to keep spending and support the economy. Consumer spending rose 1.1% in March, the Commerce Department said on Friday. Americans spent more on services like travel and food, and on goods like gasoline and groceries, showing a willingness to spend amid the highest inflation in four decades.
Big wage increases for workers reflect their increased bargaining power, but also threaten to keep inflation high. Businesses must pass price increases on to consumers to offset higher labor costs, economists say.
Consumer prices rose 6.6% year on year in March, up from a revised 6.3% rise in February and the fastest rise since 1982, the Commerce Department said on Friday.
Workers recently received pay increases at Pinches Tacos, a family-owned Mexican restaurant chain with seven locations in the Los Angeles and Las Vegas areas. Pinches president Miguel Anaya said he raised the wage for a chef from $16 to $20 an hour to discourage the worker from leaving for another job.
Mr Anaya added that he must offer increasingly higher wages to keep kitchen staff amid a labor market where poaching is rampant and labor is limited. Meanwhile, the prices of ingredients, including poultry and pork, have also risen sharply.
Due to higher labor and grocery costs, Pinches increased menu prices for its burritos and tacos by an average of about 5% earlier this year after raising them by the same amount last summer, Mr. Anaya said.
“The price for everything, including the labor, was just so high we just couldn’t swallow it,” he said. “You can only last so long.”
The wage-price dynamic has implications for the Federal Reserve, which raised interest rates by a quarter of a point from near zero in March to tame inflation. Central bank officials, meeting next week to consider their next steps, have signaled further hikes are likely to follow.
“The Fed is watching the data closely for signs of a wage-price spiral,” said Rubeela Farooqi, chief US economist at High Frequency Economics. “These readings – which show no sign of easing – will worry policymakers as they make monetary policy decisions in an environment where the labor market is tight and prices are at a 40-year high.”
Employer demand for labor far exceeds the pool of available jobseekers. There were 11.3 million job openings in February, compared with 6.3 million unemployed Americans looking for work, according to the Labor Department.
Such a tight labor market is making it harder to recruit workers and has prompted employers not only to raise wages but also to lure workers with more robust benefits. Benefits rose 1.8% in the first quarter, the fastest quarterly pace since 2004, with managerial, sales and manufacturing workers all posting gains.
Higher compensation costs are among the factors that companies say lead to higher prices for goods and services. They also cite supply chain disruptions, high energy and commodity prices boosted by the Ukraine war, and resilient consumer demand.
Rising prices reduce workers’ wage increases. Adjusted for inflation, wages and salaries in the private sector fell by 3.3% year-on-year in the first quarter. Restaurant and bar workers bucked the trend as wage increases in the low-wage sector slightly outpaced inflation, Friday’s Labor Department report showed.
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The high job turnover rate is a key factor that could keep wage increases high. Workers who change jobs tend to reap larger wage increases, putting pressure on employers to raise wages for existing workers.
Some companies see the need to further increase wages.
“The labor market remains one of the areas with the greatest inflationary pressures in both salaries and professional driver and non-driver salaries and benefits and we expect this trend to continue for the remainder of the year,” said John Kuhlow, Truck giant JB Hunt’s chief financial officer said in an earnings call last week.
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But some economists say more Americans are returning to the workforce amid dwindling pandemic savings and lower Covid-19 case numbers. As a result, more workers will be available to fill vacancies and relieve some of the pressure on employers to pay more.
“In the last few months, the labor force participation rate has started to increase in earnest,” said Ben Herzon, executive director at IHS Markit. “If this continues, it will help limit the growth rate of wages.”
RSVP Party Rentals, a Las Vegas events company, is seeing signs that wage pressure is easing after demand for its services recovers from earlier in the pandemic, President Brad Smithers said. The company struggled to hire dozens of employees. It now has around 70 employees, down from eight when the pandemic began and similar to pre-pandemic levels, Mr Smithers said.
Most of the jobs involve logistics—warehouse work, delivery, and event set-up and cleaning—but the company has also hired office workers. “It’s harder to find truck drivers. They’re in high demand,” he said.
He estimates his labor costs are 5% higher than a year ago, but he believes the upward pressure is easing.
“Corporate events are down and private events are up a little bit, so some of the people who have worked for companies are coming to us to work,” Mr. Smithers said. “It’s gotten better — quite a lot of people come to us for jobs.”
—Harriet Torry contributed to this article.
write to Sarah Chaney Cambon at [email protected] and Gabriel T. Rubin at [email protected]
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