“Whether [the rate hike] was the right move or not will be determined by wage growth,” Luke Bartholomew, global investment manager at Aberdeen Asset Management told Business Insider. “That’s the one thing that economists 20 years from now will look back on to determine if the rate hike was successful or not.”
As it stands now, wage growth has been largely stagnant during the recovery despite continued predictions that it would jump. Average hourly earnings went up by 2.3% year-over-year in the November jobs report. That is higher than months past but still well below pre-recession levels.
According to Bartholomew, whose firm manages and advises over $420 billion in assets, the hourly earnings number is hiding the real surge.
“The [Employment cost index] has been a bit stronger, and if you look at broader measures of labour inflation and wage growth there is some promising data,” he said. “I’m not telling you it’s spectacular, but it’s better than the headlines say.”
The numbers, both headline and underlying, need to improve over time to make the case that the Fed’s decision and further rate hikes were a success, he said.
The idea is that wages are tied to inflation by the wage-price spiral. Without getting too technical, the idea is that as wages go up prices follow, thus causing inflation.
This can be for a number of reasons, whether it be businesses increasing prices as they have to pay more for labour or labour demanding more to keep up with rising prices. (Here’s a paper from MIT economics professor and former chief IMF economist Olivier Blanchard detailing the theory, if you want dig deeper.)
The worry then becomes, with no wage pressure the Fed won’t be able to hit their target inflation.
Despite the subdued increase so far, Bartholomew is bullish on wage growth for a few reasons:
- The participation rate has been hiding labour market slack. If there’s a bigger pool of available candidates than the basic unemployment rate shows, then employers have no need to raise wages. As that slack comes out, the wage increases will happen.
- There’s anecdotal evidence it is about to happen. Companies from the Cheesecake Factory to Walmart have all talked about the coming wage increases.
- People are worried about asking for bonuses, but that will fade. Bartholomew speculated that workers may still have the mental scars from the last recession, and simply haven’t gotten the guts to ask for more.
While he is confident, the clear picture will only come into view as the economy adjusts to Wednesday’s hike and the further rate hikes to come. According to Bartholomew, whether or not the picture looks good comes down to how much wages grow.
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