Worker Pay and Benefits Grow at Record Pace, Pressuring Inflation

Worker Pay and Benefits Grow at Record Pace, Pressuring Inflation

Compensation for American workers grew rapidly in the first quarter, as a tight labor market put more money in workers’ pockets while also keeping pressure on inflation.

Business and government employers spent 4.5% more on worker costs in the first quarter compared with the same period a year earlier, without adjusting for seasonality, the Labor Department said Friday. That marked the fastest increase in records dating to 2001, and the gain eclipsed 4.0% annual growth in the fourth quarter.

Compensation for workers also accelerated on a quarterly basis, rising a seasonally adjusted 1.4% in the first quarter compared with a 1.0% increase in the fourth quarter. The growth reflected strengthening wages, salaries and benefits.

That has helped households continue to spend and support the economy. Consumer spending rose 1.1% in March, the Commerce Department said on Friday. Americans spent more on services like travel and dining, as well as goods such as gasoline and food, showing a willingness to spend amid the highest inflation in four decades.

Big pay gains for workers reflect their increased bargaining power but also threaten to keep inflation high. Companies need to pass on price increases to consumers to compensate for higher labor costs, economists said.

Consumer prices rose 6.6% in March from a year before, up from February’s revised 6.3% increase and the fastest pace since 1982, the Commerce Department said Friday.

Workers recently received wage increases at Pinches Tacos, a family-owned Mexican restaurant chain with seven locations across the Los Angeles and Las Vegas areas. Miguel Anaya, president of Pinches, said he raised the pay for a cook to $20 an hour from $16 to keep the worker from leaving for another offer.

Mr. Anaya added he is increasingly having to offer higher wages to retain kitchen staff amid a job market where poaching is rampant and labor is limited. Meanwhile, prices for ingredients, including poultry and pork, have also risen briskly.

Due to the higher labor and food costs, Pinches increased menu prices for its burritos and tacos about 5%, on average, at the beginning of this year, after increasing them the same amount last summer, Mr. Anaya said.

“The price for everything, including the labor, was just to a point where we just could not swallow,” he said. “You can only hold on for so long.”

The wage-price dynamics hold implications for the Federal Reserve, which lifted its benchmark rate in March by a quarter-percentage point from near zero to tame inflation. Central bank officials, who meet next week to consider their next steps, have signaled more increases are likely to follow.

“The Fed is closely tracking the data for signs of a wage-price spiral,” said Rubeela Farooqi, chief U.S. economist with High Frequency Economics. “These readings—which are showing no sign of easing—will be of concern to policy makers as they make decisions about monetary policy in an environment where the labor market is tight, and prices are at a 40-year high.”

Employer demand for workers far exceeds the pool of available job seekers. There were 11.3 million job openings in February compared with 6.3 million Americans who were unemployed but seeking work, according to the Labor Department.

Such a tight labor market makes recruiting workers more challenging and has prompted employers to not only raise wages, but also entice workers with more robust benefits. Benefits rose 1.8% in the first quarter, the fastest quarterly pace since 2004, with workers in management, sales and manufacturing jobs all seeing gains.

Higher compensation costs are among the factors companies say are leading them to raise prices on goods and services. They also cite supply-chain disruptions, high energy and commodity prices pushed upward by the Ukraine war and robust consumer demand.

Rising prices are cutting into worker pay gains. Adjusted for inflation, private-sector wages and salaries fell 3.3% in the first quarter from a year earlier. Restaurant-and-bar workers bucked the trend, as pay gains in the lower-wage sector slightly outpaced inflation, Friday’s Labor Department report showed.

The monthly jobs report reveals key indicators about the labor market and the overall state of the economy, but it doesn’t show the entire picture. WSJ explains how to read the report, what it shows and what it doesn’t. Photo illustration: Liz Ornitz

The high rate of job switching is a key factor that could keep wage gains elevated. Workers who change jobs tend to reap bigger pay increases and put pressure on employers to raise pay for existing employees.

Some businesses foresee the need to continue ramping up pay.

“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,”

John Kuhlow,

chief financial officer of trucking giant J.B. Hunt, said on an earnings call last week.

Some economists, though, say more Americans are returning to the labor force amid waning pandemic savings and lower Covid-19 case counts. As a result, more workers will be available to fill openings and take some pressure off employers to pay more.

“Over the last several months, the labor-force participation rate has begun to go up in earnest,” said

Ben Herzon,

executive director at IHS Markit. “If that continues, that will help put a cap on the rate of growth of wages.”

RSVP Party Rentals, an events company in Las Vegas, is seeing signs that wage pressures are easing after demand for its services rebounded from earlier in the pandemic, President

Brad Smithers

said. The company scrambled to hire dozens of workers. It now has around 70 employees, up from eight earlier in the pandemic and similar to its prepandemic staffing levels, Mr. Smithers said.

Most of the jobs involve logistics—warehouse work, delivery and event setup and cleanup—but the company has added office workers as well. “It’s harder to find truck drivers. They’re in high demand,” he said.

He estimated that his labor costs are 5% higher than they were a year ago but he said he thinks the upward pressure is moderating.

“Corporate events are down, and private events are up a little bit, so some of those guys who worked corporate are coming to us for work,” Mr. Smithers said. “It’s gotten better—there are a fair amount of people coming to us for jobs.”

Write to Sarah Chaney Cambon at sarah.chaney@wsj.com and Gabriel T. Rubin at gabriel.rubin@wsj.com

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