The September jobs report was a big disappointment.
Behind the weaker-than-expected payroll gains (+142,000 vs. expectations for +201,000) was something even more discouraging: a lack of wage growth.
But in a note to clients on Tuesday, Drew Matus at UBS writes that when you adjust wages for inflation, Americans actually are getting paid more.
Headline inflation, led by energy prices, has decelerated to 0.3% from 1.5% over the past year. At the same time, average hourly earnings have decelerated by just 0.5%. As a result, real wages (i.e., wages less inflation, or, workers’ standard of living) have improved. Real average hourly earnings have accelerated to 1.6% from 0.9% compared with the series’ 20-year average growth rate of 1.2%. In other words, contrary to perceptions (which are driven by tepid nominal wage gains), when adjusted for inflation, wages have accelerated rapidly over the past year.
Here’s the chart from Matus, showing the divergence between real earnings and nominal earnings (a little bit of y-axis shenanigans notwithstanding):
As Matus notes, the mood around markets since Friday’s jobs report has been somewhat downbeat, as this report has been taken as yet another indication that the US economy is slowing down more than people think.
But there are two things worth nothing.
For one, Fed officials including San Francisco Fed president John Williams have said that over the long-term, the economy will only need to add 100,000 jobs per month to sustain on-trend economic growth, far less than the roughly 200,000 jobs per month that have been added on average over the last 18 months.
And so September’s report is, in that way, not so much negative news but a harbinger of trends to come.
Additionally, Matus writes that, “real earnings points toward moderating job gains resulting from a tight labor market rather than slowing labor demand.”
Matus adds, “Firms typically set or adjust nominal, not real, wages. As a consequence, nominal wages gains often reflect low inflation. These factors would suggest that, as total inflation moves higher as energy effects fade, nominal wages could follow.”
Matus also cites the three most commonly referenced labor market indicators to reject the idea that September’s job report reflects some underlying softness in a labor market that is now growing below the expected trend.
Initial jobless claims are near an all-time low when adjusted for inflation.
Job openings are at 15-year highs.
And small businesses haven’t had this much trouble finding workers in a decade.