Low-wage workers are getting ‘eye-popping’ pay raises, Goldman Sachs says

CNN

By Moira Ritter, CNN Business

Low-wage workers are making “eye-popping” gains in their paychecks, according to Goldman Sachs.

The bank told clients in a note Thursday that low-wage-worker pay rose 5.3% year-over-year in the second quarter. For the third quarter, the data isn’t complete yet, but preliminary readings are on pace for a three-decade high of 6%.

Some industries posted even more significant increases in wages during the second quarter, including a 13% year-over-year spike for leisure and hospitality nonsupervisory workers. Since March, the industry’s wages have risen 22%, mostly because emergency unemployment benefits included in the American Rescue Plan took a larger effect on labor supply at lower wage levels. Skyrocketing wages can also be attributed in part to the rising demand for low-wage workers as the service sector has started recovering following a surge in vaccination, according to the report.

But Goldman Sachs warned that these wage indicators “cannot be taken at face value” because they are being distorted by the pandemic.

Inflation concerns

As the economy has recovered from the Covid crisis, employers have struggled to find workers amid an ongoing labor shortage. To attract employees, many employers have hiked pay.

Low-wage-workers’ pay growth drives inflation for for low-skill consumer services, including hotel lodging, dining and dry cleaner services.

But if low-wage-worker pay continues to rise, it will probably contribute to boosting inflation even more, as companies hand customers the bill for their increased overhead. A key measure of inflation, the PCE price index, which tracks consumer spending, was up 4.3% over the 12 months ending in August, marking the fastest increase since January 1991.

Some consumer services have admitted to raised their prices in response to wage pressure. Chipotle, for example, raised its prices by about 3.5% to 4% in June after it raised employee hourly wages by about $2 to an average of $15.

Although rising wages are a good thing for low-wage workers who have struggled with stagnant compensation while corporate profits have soared, low-wage growth could signal that inflation isn’t as transitory as the Fed might like.

But pay raises alone haven’t been enough to bring some workers back on the job: Although job gains were looking promising over the summer, the United States only added 235,000 jobs in August, because of the Delta variant.

Continued wage growth could normalize given the end of unemployment benefits, or if there is a better-than-expected growth in the labor force. If wage growth continues to increase and exert upward pressure on inflation though, prices for consumers could continue to rise well into 2022.

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