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Fewer workers are voluntarily changing jobs. What does that mean for wages?

The continued steady decline in voluntary labor market turnover signals a probable continued moderation in wage growth, a positive sign for the Fed as it seeks to bring down inflation.

Trends in resignations foreshadow wage growth chart illustration

As the Fed continues to mull when to begin to cut rates, an important piece of their calculus focuses on wage growth. Rising wages are supportive of consumption growth, but if wages rise too fast, unwanted inflation pressures could emerge. While wage growth has been trending downward over the past few years, it remains elevated. Along with rising shelter costs, the strength of wage growth remains a challenge to a return to the Fed’s 2% inflation goal without a sustained uptick in productivity.

As we discuss in our accompanying piece, the job market remains tight by historical standards, with more jobs than available workers in the United States. However, as the chart above shows, wage growth is projected to continue to fall in the months ahead. The number of people voluntarily quitting their jobs has been a reliable indicator of wage growth, with a lag of about nine months. As indicated in the chart, the quits rate has continued to drop rapidly in recent months. If the historical correlation with wages continues, wage growth should also decline back toward a more sustainable level that would align better with the Fed’s inflation goal.

What’s the bottom line? The Fed continues to monitor data and contemplate when to start easing policy. As yesterday’s FOMC announcement confirmed, the need for a rate cut — and the flexibility for the Fed to deliver one — doesn’t appear imminent. Declining wage growth should help to relieve inflation pressures; whether it’s enough to enable the Fed to move in June (as is currently anticipated) remains to be seen.

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