by Calculated Risk on 1/08/2023 09:39:00 AM

Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2023. Some of these questions concern real estate (inventory, house prices, housing starts, new home sales), and I’ll post thoughts on those in the newsletter (others like GDP and employment will be on this blog).

I'm adding some thoughts, and maybe some predictions for each question.

7) Wage Growth: Wage growth was strong in 2022 (up 5.1% year-over-year as of November).  How much will wages increase in 2023?

The most followed wage indicator is the “Average Hourly Earnings” from the Current Employment Statistics (CES) (aka "Establishment") monthly employment report.

Click on graph for larger image.

The graph shows the nominal year-over-year change in "Average Hourly Earnings" for all private employees.  There was a huge increase at the beginning of the pandemic as lower paid employees were let go, and then the pandemic related spike reversed a year later.

Real wage growth has trended down after peaking at 5.6% YoY in March 2022 and was at 4.6% YoY in December 2022.

There are two quarterly sources for earnings data: 1) “Hourly Compensation,” from the BLS’s Productivity and Costs; and 2) the Employment Cost Index which includes wage/salary and benefit compensation. All three data series are different, and most of the focus recently has been the CES series (used in the graph above).

The second graph is from the Atlanta Fed Wage Tracker.   This measure is the year-over-year change in nominal wages for individuals.

By following wage changes for individuals, this removes the demographic composition effects (older workers who are retiring tend to be higher paid, and younger workers just entering the workforce tend to be lower paid).

The Atlanta Fed Wage tracker showed nominal wage growth increased sharply in 2021 and for most of 2022.   In November 2022, the smoothed 3-month average wage growth was at 6.4% year-over-year, down from 6.7% earlier in the year.

Private measures of wage growth are also showing that wage growth has "slowed substantially".

This graph from Indeed, shows posted wage growth.

The Wage Tracker shows US posted wages grew in November at a robust 6.5% year-over-year pace, up from 3.1% in November 2019.

Nevertheless, year-over-year posted wage growth has declined substantially in recent months, falling from a peak of 9% in March 2022, a signal employers now face less-steep competition for new hires.

The deceleration is broad-based, with wage growth in 82% of job sectors lower in November than six months earlier.
emphasis added

Clearly wage growth is slowing and I expect to see some further decreases in both the Average hourly earnings from the CES, and in the Atlanta Fed Wage Tracker.  My sense is nominal wages will increase in the 3.0% to 3.5% YoY range in 2023 according to the CES.  This depends on the Fed (next question) and if the economy slides into a recession.

Here are the Ten Economic Questions for 2023 and a few predictions:

• Question #1 for 2023: How much will the economy grow in 2023? Will there be a recession in 2023?
• Question #2 for 2023: How much will job growth slow in 2023? Or will the economy lose jobs?
• Question #3 for 2023: What will the unemployment rate be in December 2023?
• Question #4 for 2023: What will the participation rate be in December 2023?
• Question #5 for 2023: What will the YoY core inflation rate be in December 2023?
• Question #6 for 2023: What will the Fed Funds rate be in December 2023?
• Question #7 for 2023: How much will wages increase in 2023?
• Question #8 for 2023: How much will Residential investment change in 2023? How about housing starts and new home sales in 2023?
• Question #9 for 2023: What will happen with house prices in 2023?
• Question #10 for 2023: Will inventory increase further in 2023?