Wage growth hits 5-year low as American workers find their take-home pay is 'stretched thinner and thinner'

By Greg Robb

Worker compensation grows slower than inflation for second straight quarter

Workers' wages and salaries fell 0.6% over the past year ending in September, according to new data.

American workers are being slammed by higher prices, with new data from the Labor Department showing wages rose at the slowest pace in over five years during the third quarter.

Before adjusting for inflation, wages grew at a 3.1% pace over the past year ending in September, the smallest increase since the first quarter of 2021. That's down from the 3.6% growth rate in the same quarter last year.

The data add evidence of the challenges that consumers are facing coping with rising costs.

Wages and salaries fell 0.6% over the past year ending in September.

"Wage growth has fallen short of inflation, and while increased hours worked can provide somewhat of an offset, workers in many industry groups are finding their take-home pay is being stretched thinner and thinner," wrote Richard Moody, chief economist at Regions Financial Corp.

Inflation, as measured by the Fed's favored personal-consumption-expenditure price index, was running at a 3.6% annual rate in September.

Overall, the cost of employing the average worker, which includes wages and benefits, rose 3.4% in the 12 months that ended in September. This measure, known as the employment cost index, has risen at a steady pace for four straight quarters.

Economists think the ECI is the best measure of trends in labor compensation because it includes the public sector, makes adjustments for the mix of jobs and is better for measuring pay changes with industries. But because it only comes out four times a years, another measure -average hourly earnings - is more closely watched.

According to the ECI data, union workers saw a 4.3% annual increase in compensation, while nonunion workers' compensation costs increased 3.3%.

Meanwhile, employers are also paying more for employee perks. Benefit costs rose at a 3.9% year-over-year pace, according to the ECI data. That's up from 3.6% rate in the same three-month period last year.

"The recent strength in benefits likely indicates that employers were looking for somewhat more flexible and less costly ways to reward strong performance," wrote Gregory Daco, chief economist at EY-Parthenon.

Moody said he expected wage growth to pick up in coming quarters as labor productivity growth has been strong even before AI investment is factored into the equation.

But other analysts, like Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, thinks wage growth will soften along with weak hiring.

Benefit costs, especially health-insurance plans, will accelerate meaningfully next year, Moody said.

"While firms will pass some of that rising cost burden along to their workers, we expect the net effect to be upward pressure on growth in labor-compensation costs over coming quarters," he wrote.

For the Federal Reserve, stable employment costs are welcome, as rising wages are considered a surefire way to put upward pressure on prices.

"ECI, the Fed's preferred measure of wage inflation, reaffirms other wage data that the labor market is not a source of inflationary pressures," wrote Veronica Clark, an economist at Citi.

-Greg Robb

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