Labor Market Paradox: Inflation Still Far Too High, So Why Is US Wage Growth Slowing?

The latest consumer price index data from March indicated core CPI inflation is still around 5.6%, well above the Federal Reserve's long-term target of 2%. Meanwhile, the March jobs report revealed an unemployment rate of just 3.5%. On Friday, Bank of America economist Ethan Harris discussed the seemingly puzzling dynamic that U.S. wage growth is slowing even in such a tight labor market.

The Numbers: Average hourly earnings growth peaked at around 5.9% year-over-year in March 2022 and has since slowed to around 4.2%. Harris said U.S. businesses are now simply taking a different approach to tight labor markets.

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A year ago, understaffed businesses were simply paying more to land qualified candidates. Today, Harris said, they are lowering their standards.

"They are now willing to hire less qualified (and less productive) workers. They have also given up on maintaining the usual quality of services," Harris said.

Why It's Important: As a result of the change in approach, customers are now dealing with problems such as unqualified or undertrained employees, shorter business hours, longer wait times and fewer amenities.

Unfortunately, Harris said these adjustments do not solve the ongoing labor shortage problems, and the labor market is still out of balance. He said there seems to be no other way to restore a healthy balance other than a mild recession and a spike in the unemployment rate.

Benzinga's Take: Investors don't seem to be too concerned about a potential recession in 2023. Despite the rising probability of a recession looming, the SPDR S&P 500 ETF Trust SPY is up 8% year-to-date.

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