Importance: ****

Definition: Average hourly earnings (AHE) is an  important indicator of labor cost inflation and of the tightness of labor markets - something the Federal Reserve pays close attention to when setting interest rates.

Related Indicators: Employment Cost Index (ECI), Employment - Payroll Jobs, Unemployment Rate

Source: Bureau of Labor Statistics of the U.S. Department of Labor

Frequency: Monthly

Availability: One week following the reported month

Direction: Pro-cyclical

Timing: Coincident

Volatility: Little
 
Likely Impact of Financial Markets:

Interest Rates: Larger-than-expected increases are considered inflationary causing  interest rates to rise. The bond market views an increase in AHE as leading to labor cost inflation that is inflationary if in excesss of productivity growth. A large rate of growth of AHE also make it more likely that the Fed will increase the Fed Funds rate that is also bearish for the bond market.

Stock Prices:  Higher wage inflation is bearish for the stock market because high wage growth may reduce profits, increase long-term interest rates and lead the Fed to increase the Fed Funds rate to stem inflation.

Exchange Rates: Uncertain. High wage inflation leads to high inflation and loss of competitivenss. However, it also leads to higher nominal interest rates and real ones too if rthe Fed tightens; such an increase in interest rates would tend to strenghten the exchange rate.

Analysis of the Indicator:
High rates of growth of average hourly earnings (AHE) (wage inflation) would lead to higher inflation if the wage growth is above productivity growth. A related measure of wage cost growth closely watched by the Fed is the Employment Cost Index (ECI). Compared to the ECI that is published only quarterly, the strenght of the average hourly earnings measure it that is published monthly and is an early indicator of wage growth in the previous month. However, compared to the ECI,  AHE has several weaknesses. First,  the ECI is abroader measure of labor costs as it includes wages and salaries as well as benefits costs (fringe benefits such as medical benefits).  Second, the ECI corrects for the composition of the labor force: average hourly earnings may increase bacause more workers are employed in better skills jobs that pay higher high hourly wages rather than beacuse the same jobs pay higher hourly wage. The first effect due to a change in the distribution of labor across different jobs is not inflationary; however, kit leads to an increase in the AHE but not of the ECI. Third,  unlike the ECI, AHE increase also due to transitory increases in wage costs that are not causes of permanent higher wage costs; for example, increased use of transitory overtime that is usually paid with higher hourly wages leads to an increase in AHE but not of the ECI. For all the above reasons, Greenspan and the Fed give more weight to the quarterly ECI report rather than the monthly AHE report is deciding whether wage inflation and wage costs are increasing or not.
 

WEB Links

A Table of the latest Average Hourly Earnings data from The Economic Statistics Briefing Room
of the White House.

The latest Average Hourly Earnings report from BLS.
 
See the Dismal Scientist Homepage for charts, tables and analysis of the unemployment rate in the latest employment report.