WSJ - Markets

Finally, a Brighter Outlook for Wages

Rising wages have been one important missing element of the economic expansion. Now there is evidence worker pay will start to pick up.

December was another solid month for employment, with the Labor Department reporting on Friday that the economy added 148,000 jobs, but it is also clear that hiring is slowing. The slower pace may be more a reflection of supply than demand: With the unemployment rate at a low 4.1% in December versus 4.7% a year earlier, it is harder for companies to find qualified workers.

The good news in the numbers was wages. Average hourly earnings were up 2.5% in December versus a year earlier, hewing to a trend that has been in place for over two years. But December 2016 was a strong month, meaning last month needed to be strong to match that pace. On a monthly basis, hourly earnings gained 0.3% in December from a month earlier, on the high end of recent monthly gains. Wages increased just 0.1% in November.

There is good evidence that January will be relatively strong too. The corporate tax cut is giving businesses more wherewithal to compete with each other for workers:  In a recent report, Strategas Research listed 79 U.S. companies that  publicly announced they were giving out bonuses, increasing wages or taking other employee-friendly steps since the tax cut passed into law. And minimum-wage levels were just boosted in several big states, including California and New York.

If the start of the year is strong, wage gains could soon approach 3% compared to a year earlier. Higher wages would start to solve one of the riddles about the economy since unemployment reached low levels. More cash for workers could boost consumer spending and make a slight dent in income inequality.

Stronger wage growth is exactly what Federal Reserve policy makers want. If it comes they will be emboldened to keep raising rates this year, perhaps by more than the three increases they have penciled in.

For companies, it would be more of a mixed bag: On the one hand, they would need to pay workers more; on the other, they are getting a windfall from tax cuts and workers with more cash may mean better sales. For investors, a combination of higher rates and rising labor costs could be challenging, but it would probably be better than the alternatives.

Write to Justin Lahart at justin.lahart@wsj.com

WSJ.com: Markets

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