A new report points to two years of record breaking wage growth in Washington. This week economist Paul Turek joins us to talk about what the numbers really mean for workers and what to expect as the Fed tries to tamp down inflation.
Since 2019 the average annual wage in Washington has grown by more than $13,000 dollars. The Washington State Employment Security Department tracks wage growth trends in its work of calculating the unemployment insurance rate employers will pay the following year. According to ESD: in 2019 the average annual wage in Washington was $69,000; in 2020 that grew to $76,741; and in 2021 it grew to $82,508.
To look at it another way, wages grew just over 10% on average from 2019 to 2020. That was the highest annual increase on record. In 2021 the average annual wage grew another 7.5% in Washington. That was the second highest annual increase on record. Taken together there was a 17.6% average pay increase over just three years.
Wage Growth vs. Inflation
“It’s mostly just a bounce back. It’s the combination of high demand for workers and as a result of workers being a little bit reluctant to get right back into the job market again. They’ve been entering a little bit more now, but we’ve pushed the unemployment rate back down to historic low for Washington state, 3.9%. That shortage of workers is alleviating a little bit, but it’s still a very tight labor market,” said Paul Turek, State Economist, Washington State Employment Security Department.
The first half of 2022 has been marked by record high prices for groceries, gasoline, and basic necessities in general.
Then and Now
Turek says the economic challenges facing Americans today are reminiscent of the challenges of the late 1970’s and early 1980’s.
“What happened then . . . began in the late seventies and moved into the early eighties, was the Fed took a very tough position, said, well I have to deal with a recession or I have to deal with inflation, which am I going to work at? So we were dealing with a stagflation issue back at that time, sometimes called the two-headed monster. What the Fed decided it had to do was cut off the head of the monster. That was most pivotal and that was the inflation. In order to do that, we got plunged into a recession with rising interest rates. Eventually we came out of that and in very good shape. Inflation got bottled up, but we seem to have lost some of that memory from the late seventies and eighties. We’ve let the genie out of the bottle again. And once you let it out, it’s very difficult to corral it and put it back together again,” said Turek.
Options for Dealing with Inflation
“There have been some instances where politicians have tried to spend their way out of it. You can’t. There are those who instituted wage and price controls. Some of that’s being kicked around now. It didn’t work out back then. It won’t work now. And what eventually happened is that the Federal Reserve had to deal with inflation. Now, it had to deal with two things at the same time. We were undergoing a recession, but we were also dealing with runaway inflation. Some of the factors are still there that were existent back then. We don’t have so much cost of living adjustments as much as what we did back then, but you still have, in a tighter job market, workers still demanding more wage increases, better working conditions, that can have an effect on pushing that inflation up,” said Turek.
Beyond raising interest rates, Turek says the Federal Reserve has other strategies that can be used to reduce inflation.
“It also was supporting a lot of the increase in demand, particularly in housing, by purchasing mortgage backed securities and other open market purchases that put even more money into the economy to increase demand. It can now start taking the reverse of that instead of quantitative easing, as it’s called, can now move to quantitative tightening, start eliminating securities that it has on its balance sheet, and bringing some of that money back out, which a lot of people are favoring right now,” said Turek. “I think that will keep it, those interest rates, from rising to the point that it did in the early 1980s.”
Implications for Housing
Corrective action from the Fed might slow the explosive growth in the cost of housing, but that’s not necessarily good news for people priced out by bidding wars or rising rent, according to Turek.
“You don’t really see big dips in housing prices. Some of it has to do with inventory, has to do with home building,” said Turek. “It’s supply and demand. When you see mortgage rates increase to the extent that they’ve been increasing, it takes a lot of steam out of the housing market. So it’s going to reduce the price rise in housing. What it does do, it makes prices for homes a lot more out of reach because of the higher mortgage rates. So we’re starting to already see a collapse in building activity, collapse in new home sales. That’s one of the first things that happens when you start raising interest rates. The byproduct of that, though, is that it spills over into the rental market and is making rental prices even that much more out of reach.”