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Slowing Wage Growth Is Actually a Good Thing

Author: Andrew Flowers
31 Jan 23

The U.S. labor market has remained resiliently strong, despite tech layoffs, recession fears, and still-high (but ebbing) inflation. A key factor in the economic outlook in 2023 is wage growth. Why? The Federal Reserve has been aggressively raising interest rates to combat high inflation. Too strong wage growth could potentially contribute to keeping price growth stubbornly high.

Today we got some good news, though: Wage growth slowed in Q4 2022, according to the Employment Cost Index (ECI). The ECI is the Fed’s preferred metric for wage growth because it adjusted for the composition of jobs in the economy. The ECI measure of wages and salaries for private-sector workers increased 5.1% in the final three months of 2022 (compared to the same period a year prior). While this level of wage growth is still quite strong, it was a noticeably slowdown from Q3. The Fed – which is set to raise interest rates by a quarter percentage point on Feb. 1 – must be happy. 


The ECI is just one read on wage growth, of course. But it’s consistent with the Atlanta Fed’s wage growth tracker: According to its measure of median wage growth in the three months through December, wages rose 6.1%. Both series are at an inflection point. 

While economists (and the Fed) want to see strong wage growth for workers, the reality is that the recent pace of wage gains does not allow for price stability. The fact that it’s now slowing from historically elevated levels gives the Fed cover to slow its pace of interest rate hikes. Perhaps as soon as its meeting in early May, the Fed may hold rates unchanged at a level just short of 5%. If inflation data continues to be encouraging, hopes for a so-called “soft landing” will rise.

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