The latest inflation and real earnings data from the Bureau of Labor Statistics contains some good news for workers. Real average hourly earnings --- essentially, workers' hourly pay reduced by the amount of inflation, on average --- increased for the first time in 2023 and for the third time in the last six months. More simply, workers' pay increased faster than consumer prices in March 2023.
That's the good news. There's also some not-so-good news. Real average weekly earnings declined very slightly in March for only the third time during the last six months. The different outcomes between hourly earnings and weekly earnings can be explained by the second consecutive month of decline in the average number of hours worked during the average week by all employees. Remember that last statistic the next time you hear an employer complain they can't find enough workers. On average, they are reducing the hours of their current workers.
These recent data are the result of two events occurring at the same time in our economy. First, workers continue to have meaningful bargaining power in jobs markets. As a result, nominal wages (i.e., wages not adjusted for inflation) have been rising consistently and significantly for many months. Friend-of-the-blog and top-notch labor economist Aaron Sojourner has produced a fascinating way to measure workers' power in jobs markets and their ability to deploy that power to drive up their nominal wages. He calls it the "labor leverage ratio."
Basically, the labor leverage ratio is produced by dividing the number of workers quitting their jobs each month (using a three-month average) by the sum of the number of workers laid off and discharged from their jobs each month (for the algebraically inclined, it's Quits/(Layoffs + Discharges)). Since only 10% of workers in the U.S. are union members, most workers do not have genuine voice in the workplace and are able to improve their work lives only by quitting. If they are able to quit, they have some power in relation to their current and future employers. Sojourner's analysis shows a close correlation between the labor leverage ratio and nominal wages. Right now, the quits rate is high and the layoffs/discharges rate is low, so nominal wages are rising.
At the same time, inflation is weakening. It isn't weakening consistently, reliably, or as quickly as we might like, and the pace of price increases is not consistent across products. Nonetheless, inflation is certainly increasing more slowly now than it was in the first half of 2022. As a result, workers are benefitting more from their hard-won nominal wage increases. The big question is, are workers feeling these improvements when they go to the grocery store, pay their rent, or fill up their gas tanks? Because the gains have not been sustained over an extended period of time, and some prices are rising faster than others, the answer is probably no.
In other words, we are going to need several more months with rising real hourly and weekly earnings before workers will begin to feel secure that their economic lives are improving.
