For more than a year, an egalitarian narrative dominated the discussion about wages in America. Low-income workers were seeing the most pay increases, while benefits for better-paid workers lagged behind. But quarterly results posted by banks last week could spur that conversation, and when US Federal Reserve policymakers meet this week, they will look to keep wage gains broad from adding to America’s already high inflation. You may feel extra pressure.
The five largest U.S. banks increased compensation by 15% last year, more than twice as high as consumer price inflation, and further increases are expected in the times to come. JPMorgan Chase raised salaries for junior bankers for the second time in six months, and other banks took similar steps. Not only this, there were also reports that bankers in top earning positions are seeing an even bigger increase. At Goldman Sachs Group, approximately 400 executives who fill the highest level of investment bank are slated to receive a special one-time reward in addition to an annual bonus.
It’s not just banking. Compensation for high-skilled positions more broadly is beginning to see a rapid increase.
“We’re seeing some pay pressure at the end of the year that is stronger than it was in the first half of 2021,” Nela Richardson, chief economist at payroll and human resources outsourcing company Automated Data Processing, said in a Bloomberg surveillance interview. Week. “In industries that lacked talent before the pandemic, we are seeing gains,” Richardson said, “it is not the industries that were hardest hit, such as leisure and hospitality.” This business is services, finance, information technology. That’s where you’re seeing double-digit gains from a year ago to December.”
Anyone who gets a decent paycheck usually feels great about it, and there’s nothing wrong with being well rewarded for working hard. But the fact that central bank liberalism and yawning income inequality are once again well on top of that may not sit well with the US Fed.
This reality should prompt the central bank to tighten monetary policy more quickly and firmly than financial markets have been expecting. Bond traders are seeing three or four Fed rate hikes this year, the end of quantitative easing and the beginning of a reduction in the size of the Fed’s $8.87 trillion balance sheet.
However, many Wall Street analysts and arguably even stock investors haven’t fully bought into the actual amount of potential policy to come. The longer monetary policymakers wait, the more they risk hurting low-income households, whose spending power declines most rapidly when inflation picks up.
This would already be happening. As Deutsche Bank AG’s global head of currency research George Cervelos wrote in a note on Friday, “inflation is contracting.” He said the consumer is “in trouble”, with America’s real disposable income now down 3% from its pre-eminent period. Covid trend and real wages deeply negative. In short, many families are finding it increasingly difficult to afford basic items and are starting to reduce. “This is very different from the inflationary environment of the 1970s when real wages were rising rapidly,” Cervelos wrote.
Wages fell 2.3% in December, after accounting for inflation, according to the US Department of Labor, and have been negative since April. Although the Federal Reserve Bank of Atlanta’s Wage Tracker index showed low-skilled workers receiving an average wage increase of 3.7% in the second half of last year, compared to a 3.5% increase for high-skilled workers, the two categories were closer. Was looking Same pace of compensation benefits till December. And, of course, all those figures pale in comparison to the 7% consumer price inflation reported by the Bureau of Labor Statistics last month.
Some might say the Fed should be patient as there are signs that the Omicron version of Covid is weighing on the economy. Last week, the Labor Department showed that applications for unemployment in the state rose to a three-month high from the previous week. And a few days ago, a Federal Reserve Bank of New York gauge of manufacturing in the state fell to minus 0.7 for January from 31.9 in December. (Figures below zero indicate contraction.) But rapid inflation is a liability for the US economy, as it undermines consumer sentiment and purchasing power.
The US Fed meeting this week should address differing fates at a time of rapid inflation. It’s hard for the Fed to justify an easy-money policy when the richest keep coming out on top, especially in the labor market, and those at the bottom feel the most pain.
Lisa Abramowicz co-hosts ‘Bloomberg Surveillance’ on Bloomberg TV
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