Inflation debates have been dominated by fallout from the pandemic and economic reopening, most of which has been viewed as transitory: lumber and used car prices in the first half of the year, the cost of ocean freight more recently. Rising housing rents are now expected to flow into the inflation data as well. But the most underappreciated inflation risk is wage growth.
Even with the disappointing number of jobs added in last week's report, worker incomes continued to rise quickly in September, and those increases are more likely to persist. We shouldn't expect inflation to return to 2% until either job growth or wage growth slows down.
So much of the labor market discussion and how it might feed into inflation has been looked at through the lens of the unemployment rate or the job shortfall compared with February 2020 pre-pandemic times. We have five million fewer jobs today than we did back then. If you consider all the jobs we would have added had we continued at the same growth rate as early 2020, the hole is more like eight million. If we're so far from those employment levels, the thinking goes, the labor market can't be a major driver of inflation.
But that's only part of the picture. Income growth — the amount of money workers are taking home — is a more relevant factor for inflation than employment levels. For that, aggregate weekly payrolls — essentially jobs times hours worked times wages — is the better measure. In September, aggregate weekly payrolls for non-managerial workers grew 10.7% year-over-year, its sixth straight month of 10% year-over-year growth, a dynamic we haven't seen in almost 40 years. And this isn't due to a few big months in the spring — September's monthly growth rate was 13.2% on an annualized basis as fast wage growth compensated for the disappointing increase in the number of jobs.
The only time we've seen aggregate weekly payroll growth in the double digits was between 1968 and 1984, when inflation was a problem in the economy. In the 2010's the growth rate was closer to 4.5%, which worked out to around 2% employment growth and 2.5% wage growth. Right now we're closer to 4% employment growth and 6% wage growth.
