The September employment report showed average hourly earnings up 3.0% from a year earlier, the slowest pace since May 2021. On a year-ago basis, the Employment Cost Index (ECI) has also slipped and is below CPI inflation for the first time since early 2023. At the same time, corporate profit margins sit at their highest level since the series began in 1947, and labor’s share of output is the lowest on record. We have long argued that a shrinking pool of available workers could put more upward pressure on wages and threaten those margins. Companies responded to the labor shortage much as we expected, by investing in capital and lifting productivity. What has not followed is a meaningful recovery in wages. In this Economics Weekly, Richard de Chazal looks at why pay has lagged in a tight labor market, and what that means for the Fed and for investors.
