Compensation for American workers increased rapidly in the first quarter, as a tight labor market put more money in workers' pockets while keeping inflation under control.
Without adjusting for seasonality, business and government employers spent 4.5 percent more on worker costs in the first quarter compared to the same period a year ago, according to the Labor Department on Friday. That was the fastest increase since records began in 2001, and it surpassed 4.0 percent annual growth in the fourth quarter.
On a quarterly basis, compensation for workers increased by 1.4 percent in the first quarter, compared to a 1.0 percent increase in the fourth quarter. The expansion reflected higher wages, salaries, and benefits.
This has allowed households to continue spending and supporting the economy. The Commerce Department reported on Friday that consumer spending increased by 1.1 percent in March. Americans increased their spending on services such as travel and dining, as well as goods such as gasoline and food, demonstrating a willingness to spend despite the highest inflation in four decades.
Workers' large pay raises reflect their increased bargaining power, but they also threaten to keep inflation high. Economists believe that companies must raise prices to compensate for higher labor costs.
Consumer prices rose 6.6 percent year on year in March, up from the revised 6.3 percent increase in February and the fastest rate since 1982, according to the Commerce Department on Friday.
Workers at Pinches Tacos, a family-owned Mexican restaurant chain with seven locations in Los Angeles and Las Vegas, recently received wage increases. Miguel Anaya, president of Pinches, stated that he increased the pay for a cook from $16 to $20 per hour in order to keep the employee from leaving for another job.
Mr. Anaya added that in a job market where poaching is rampant and labor is scarce, he is increasingly having to offer higher wages to retain kitchen staff. Meanwhile, prices for ingredients such as poultry and pork have risen rapidly.
Due to higher labor and food costs, Pinches increased menu prices for burritos and tacos by about 5% on average at the start of this year, after increasing them by the same amount last summer, according to Mr. Anaya.
"The price for everything, including labor, was just too much for us to bear," he explained. "There's only so long you can hold on."
The wage-price dynamics have implications for the Federal Reserve, which raised its benchmark rate by a quarter-point from near zero in March to tame inflation. More increases are likely to follow, according to central bank officials who will meet next week to discuss their next steps.
"The Fed is closely monitoring the data for signs of a wage-price spiral," said Rubeela Farooqi, High Frequency Economics' chief U.S. economist. "These readings, which show no signs of easing, will worry policymakers as they make monetary policy decisions in an environment where the labor market is tight and prices are at a 40-year high."
Employer demand for workers far outnumbers the available pool of job seekers. According to the Labor Department, there were 11.3 million job openings in February, compared to 6.3 million Americans who were unemployed but looking for work.
Due to the difficulty of recruiting workers in such a tight labor market, employers have been forced to not only raise wages, but also to entice workers with more robust benefits. Benefits increased by 1.8 percent in the first quarter, the fastest quarterly increase since 2004, with gains in management, sales, and manufacturing jobs.
Companies say that higher compensation costs are one of the factors driving them to raise prices on goods and services. They also point to supply-chain disruptions, high energy and commodity prices pushed up by the Ukraine conflict, and strong consumer demand.
Rising prices are reducing wage increases for workers. Adjusted for inflation, private-sector wages and salaries fell 3.3 percent year on year in the first quarter. Restaurant and bar workers defied the trend, with pay increases in the lower-wage sector slightly outpacing inflation, according to a Labor Department report released on Friday.
The high rate of job switching is an important factor that could keep wage gains high. Workers who change jobs typically receive larger pay raises and put pressure on employers to raise pay for current employees.
Some companies believe that increasing pay will be necessary in the future.
"Labor continues to be an area with the greatest inflationary pressure in both professional driver and nondriver salary wages and benefits, and we expect that trend to continue throughout the remainder of the year," J.B. Hunt's chief financial officer, John Kuhlow, said on an earnings call last week.
However, some economists believe that as pandemic savings dwindle and Covid-19 case counts fall, more Americans are returning to the labor force. As a result, more workers will be available to fill openings, relieving employers of the need to pay higher wages.
"The labor-force participation rate has begun to rise in earnest over the last several months," said Ben Herzon, executive director at IHS Markit. "If that continues, it will help to limit the rate of wage growth."
RSVP Party Rentals, a Las Vegas-based events company, is seeing signs that wage pressures are easing as demand for its services has recovered from earlier in the pandemic, according to President Brad Smithers. The company had to scramble to hire dozens of people. It now has around 70 employees, up from eight earlier in the pandemic and similar to pre-pandemic levels, according to Mr. Smithers.
The majority of the jobs are in logistics—warehouse work, delivery, and event setup and cleanup—but the company has also added office workers. "It's becoming more difficult to find truck drivers." "They are in high demand," he explained.
He estimates that his labor costs are 5% higher than a year ago, but he believes the upward pressure is easing.
"Corporate events are down, and private events are up a little bit," Mr. Smithers explained. "Some of those guys who worked corporate are coming to us for work." "It's gotten better—a good number of people are coming to us for work."