March 13

  • Average hourly earnings rose 3.4 percent in February, the best increase since April 2009.
  • For the first time during the recovery, lower-end earners are getting more of the benefit, according to a Goldman Sachs report.
  • The trend could mean that the economy has more strength to it than some economists think.

The recent jump in paychecks has come with an unusual characteristic, as workers at the lower end of the pay scale are getting the greater benefit.

Average hourly earnings rose 3.4 percent in February from the same period a year ago, according to a Bureau of Labor Statistics report last week. That’s the biggest gain since April 2009 and seventh month in a row that compensation has been 3 percent or better.

What has set this rise apart is that it’s the first time during an economic recovery that began in mid-2009 that the bottom half of earners are benefiting more than the top half — in fact, about twice as much, according to calculations by Goldman Sachs. The trend began in 2018 and has continued into this year, and could be signaling a stronger economy than many experts think.

“Our findings suggest scope for continued firm overall wage growth, given that lower income wage growth is more cyclical and persistent, and given potential room for further acceleration in high income wages,” Goldman economist David Choi said in a research note.

The internals of February’s nonfarm payrolls report, which showed overall job growth of just 20,000, back up the notion that workers in typically lower-paying industries are finally starting to see some real growth in their paychecks.

For instance, retail industry employees saw an increase of 5 percent and leisure and hospitality earnings rose 4.6 percent from February 2018. At the same time, professional and business services workers gained 2.8 percent while Wall Street-related positions in finance increased just 2 percent.

On a broader level, the current labor market dynamics were missing for most of the recovery and are pointing to the kind of inflation that policymakers at the Federal Reserve have been waiting for. While wage growth for higher earners tends to be tied to stronger corporate profits, the benefits to lower-paid workers tend to arise as the labor market gets tighter, according to the Goldman analysis.

The wage trends also could help rebut the growing belief that the economy won’t be able to sustain the growth it saw in 2018.

“Taken together, our findings suggest a relatively optimistic consumption outlook given solid income growth across income levels,” Choi wrote. “Even if employment growth slows as labor supply constraints start to bind, this should be partially offset by the continued firming of wages, particularly among lower income workers with higher marginal propensities to consume.”

One danger is that higher wages could start to eat into corporate profits, which have doubled since the financial crisis.

However, it could take years for that to be a significant factor, according to an analysis by AB Bernstein.

“While pressure on capital share is likely to remain, that doesn’t mean that profits are going to fall – in fact profits can lose share at a rate up to about 100bps per year [1 percentage point] and still expect to have positive profit growth,” Philipp Carlsson-Szlezak, chief U.S. economist at AB Bernstein, said in a note. “In other words, overall expansion of net value add can be strong enough to protect profit growth even in the face of a rising labor share.”

Carlsson-Szlezak said wage pressures more likely would be felt at a sector level in industries where labor takes a bigger share of output. For example, information technology and extraction likely would feel the least effects, while hospitality and retail would be hit hardest.