Pay increases for American workers have continued to decline from their post-pandemic highs. According to new data from ADP, annual wage growth for workers who remained in the same job in June slowed to the lowest rate in nearly three years. Similarly, annual wage increases for job changers have declined for three consecutive months.
Slowing Wage Growth
ADP’s chief economist, Nela Richardson, noted, “We are in a different regime than we’ve been in the past where that job-stayer growth was either flat or even rising.” The question now is how low wage growth will go. Richardson emphasized that a return to pre-pandemic wage growth levels is still uncertain.
In June, wages for job stayers increased by 4.9% year-over-year, down from 5% in the previous month and the slowest growth since August 2021. For job changers, wages rose by 7.7% year-over-year, slightly down from 7.8% the previous month and significantly lower than the 16.4% peak in June 2022.
Labor Market Tightness
Despite the slowdown in wage growth, Richardson pointed out that the still-elevated pay gains for job switchers indicate ongoing labor market tightness. This observation aligns with other recent labor market data showing a mixed picture of cooling but not a rapid decline.
For example, new data from the Bureau of Labor Statistics revealed that job openings increased to 8.14 million at the end of May, up from 7.92 million in April. The ADP Research Institute’s National Employment Report showed that the private sector added 150,000 jobs in June, a slight deceleration from 157,000 jobs in May.
Economic Stability
Richardson suggested that the current range of 120,000 to 150,000 monthly job additions keeps the labor market stable, avoiding signals of a significant economic slowdown while not overheating. “It’s the rate at which the economy evolves, not necessarily the level,” Richardson explained. A gradual cooldown is manageable, but a steep decline would be concerning.
With the unemployment rate at its highest level in more than two years and continuing unemployment benefit claims rising weekly, economists remain cautious about the labor market’s future. The Department of Labor reported nearly 1.86 million continuing unemployment claims for the week ending June 29, up from 1.83 million the previous week.
Market Reactions and Federal Reserve Policy
Nancy Vanden Houten, lead US economist at Oxford Economics, noted, “While layoffs for now remain low, we think the rise in claims reflects more workers applying for benefits because they are finding it more difficult to find jobs as the pace of hiring has slowed.” Despite the increase, initial claims remain below levels that would signal a significant slowdown in job growth.
Current labor market conditions allow the Federal Reserve to be patient before lowering interest rates. Recent favorable inflation data also provide the Fed with the flexibility to respond to any unexpected labor market weakening.
The next major labor market update will come on Friday with the Bureau of Labor Statistics’ nonfarm payroll report. Bloomberg data suggests that 190,000 nonfarm payroll jobs were added to the US economy in June, with the unemployment rate holding steady at 4%.
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