Cooling Economy Is Giving US Workers a Lift

The red-hot labor market is cooling. Monthly US job growth has slowed to around 270,000 from more than 500,000 at the start of the year. Employers are staffing up, returning average work weeks to pre-pandemic levels. Labor-market churn has subsided, with the rate at which workers are quitting their jobs falling back to early 2021 levels. Hiring rates have fallen, too.

And yet despite all this, the fortunes of US workers have arguably improved more over the past few months than they have all year. Gradual normalization from pandemic and supply-chain disruptions are benefiting both employers and workers. Think of it as a one-off productivity dividend as the economy becomes more efficient. This time last year we saw strong nominal growth while inflation-adjusted growth was poor; Now things are moving in the opposite direction.

To get a picture of this, look at real average weekly earnings, which take into account both the nominal level of wage growth as well as inflation. There was a boom when the pandemic first hit due in part to composition issues with the index: Lots of the jobs lost during the pandemic were low-paying, such as in retail and hospitality. So those who remained employed had higher average wages than in the pre-pandemic universe. As those lower-paid workers got rehired, the average fell back.

The more important real-earnings story in 2022 has been about the relationship between inflation and wage growth rather than the composition of job growth. In the first half of the year, headline inflation as measured by the Consumer Price Index rose by 5.4%, or 11.1% at an annualized rate. Even though job growth was robust — good news for people who were unemployed or re-entering the workforce — wage growth couldn't keep pace with that level of inflation, so the typical worker was falling behind. This explains some of the "vibecession" sentiments that people were feeling as gasoline prices were surging to $5 a gallon.