An Economist Explains Why Wage Growth Is Poised To Take Off

Capital Economics’ Paul Ashworth is taking the view that wage growth is about to pick up.

In a new research note, Ashworth argues that “the current rates of wage and price inflation may be unusually low, but we are becoming increasingly concerned that the dwindling slack in the labour market will trigger a rise in wage inflation this year.”

“Barring an unexpected acceleration in productivity growth, that pick-up in wage growth is likely to prompt a rebound in core inflation too,” he writes.

From Ashworth:

In our recent US Focus “Fed will eventually have to hike rates more rapidly” (sent to clients on 13th January), we argued that the rapid decline in the unemployment rate to only 6.7% in December last year, would eventually prompt a rise in wage inflation because the decline in the participation rate was primarily a structural rather than cyclical shift. As [the chart below] shows, if the historical Phillips- curve type relationship held, then the decline in the unemployment gap, which is the gap between the actual unemployment rate and the estimated longer-run equilibrium unemployment rate, would drive the growth rate of average hourly earnings steadily higher over the next couple of years.

Some more reasons we may see wage growth.

— “The jobs hard to fill index in the NFIB’s small business survey is at a five-year high and points to what could be a fairly dramatic acceleration in wage growth this year.”

— “From the JOLTS survey on labour turnover, the pick-up in the job openings rate and the voluntary job quits rate both point to an acceleration in the growth rate of average hourly earnings.”

— “Finally, the survey evidence on future wages is also fairly clear. There has recently been a sharp increase in the proportion of small businesses in the NFIB survey saying that they plan to increase workers compensation, which points to a rapid rise in wage inflation this year.”

If wage growth grows, that could have big ramifications for core inflation, Ashworth notes. Check out the chart:

Ashworth’s position, however, is actually up for debate. Some Wall Street minds, like Goldman Sachs’ Jan Hatzius, believe that there actually is slack in the labour market, which will help keep inflation super low in 2014.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.