What was with the strong wage growth?

The recent labour market data illustrated that employment was falling – but interestingly average wages rose 5.3% on a year earlier.  Does this mean things are stronger than expected?  [I would note that this number didn’t surprise any of the economists I have talked to today – it is just possible that some people may see it as surprising].

The short answer is no.  Lets look at some reasons why:

1. Wages are a lagging indicator – generally, people move wages based on where wages have moved previously as well as what they can negotiate.  In such a situation it takes wage growth longer to change than employment.
2. We are looking at a “mean wage” – as a result the composition of jobs matters.  If only unproductive jobs are getting flushed out, the “mean wage” will grow more strongly than the effective underlying wage in a fully employed economy.
3. When employment is falling, staff are getting fired.  At some level this may increase the “marginal product” of staff in a similar role.  If this is what is going on, then firms will share the cost savings associated with sacking some staff with the other staff through wage increases.

Fundamentally, wages lag movements in the economy.  So don’t let anyone tell you that the strong wage growth implies that our economy is looking super duper – as that isn’t the normal direction of events.  Keep an eye on the leading indicators:  house sales, durable goods sales, consumer and business confidence, and commodity prices.