Wage growth is slowing, but it’s still staying ahead of inflation

Wage increases slowed down this month — again. The payroll company ADP says year-over-year, the median wage gain is 4.6% for people who stay in the same job. It’s 6.2% for the people who switch jobs.

That rate of increase has been slowing down for a couple years now, which makes sense. That’s one of the side effects of curbing inflation. But we’re at the end of 2024 and it’s still falling. How low can it go before a good sign turns into a bad one?

The actual wage increase number isn’t all that important, said Bankrate’s senior economic analyst Mark Hamrick.

“The magic number is positive with respect to real earnings. Real earnings being earnings adjusted for inflation,” he said.

Right now it is positive, because those wage increases have been bigger than price increases. Inflation is around 2.5% while wage gains — even for folks who stay in the same job — are almost twice that.

“Wages have outpaced inflation for a year and a half now,” Hamrick said.

That’s because it’s still a workers’ market, said Nicole Smith. She’s chief economist at Georgetown’s Center on Education and the Workforce.

“Those workers still have the upper hand to make decisions about moving or staying and what types of wages they will accept,” she said.

Smith said demand for workers (think job openings) is still greater than the supply (think unemployed people).

“If you’re an employer, you still have to play it safe, because if you drop those wages too substantially, you run the risk of losing your employees,” she said.

So wages are growing faster than inflation, even though wage gains have fallen. Dean Baker, a senior economist at the Center for Economic and Policy Research, said that’s a win-win. Today’s job market is a far cry from what we saw two years ago, he said.

“If wages go up rapidly enough, that will be passed on in prices, and we were seeing that. So what’s happened is the labor market has normalized. It’s still strong,” he said.

Perhaps even better news: Baker said he thinks this 2% gap of wage gains over inflation could stick around.

“If you could point to a period of 2% sustained real wage growth. You really have to go back to the ’60s. So, things look pretty good right now,” he said.

Tomorrow we’ll get a look at the employment cost index for the third quarter of this year — a major indicator of economic health for the Federal Reserve as it weighs future interest rates.