Employment growth, as a precursor to higher interest rates, is actually a proxy for higher labour costs

John Robertson


Employment growth, as a precursor to higher interest rates, is actually a proxy for higher labour costs. If employment growth in the USA does not lead to an acceleration in wages growth, there may not be any inflation related reason to raise interest rates. The chart shows movements in employment (the red line) and movements in average hourly earnings of non supervisory workers (the blue line) since 1965. Wages usually start to rise more quickly after employment growth has hit its peak. That is what has happened in this cycle, too, except that the rate of wage increase is nearer 2% rather than 4%. So far, the signs are good that remedial action on the interest rate front is not needed to counter inflationary pressures from an overly extended labour market. These pressures could still lie ahead. Alternatively, there might be structural reasons why a sharper acceleration in labour costs will not happen. US monetary policy and ongoing equity market conditions will depend on the judgement being made on this point.

John Robertson is Chief Investment Strategist for PortfolioDirect a provider of resource sector investment stock ratings and portfolio strategies for mining and oil and gas investors. He has worked as a policy economist, corporate business...


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