In the first three quarters of this year, hourly compensations in the U.S. nonfarm business sector rose at a rate of 3.1 percent, about three times the pace of advance observed in 2013. Over the same period, unit labor costs accelerated to an annual rate of 2.1 percent from 0.25 percent. [Unit labor costs are a difference between wages and labor productivity. They are usually thought of as a floor below the country's inflation rate.]
This sharply rising price of labor since the beginning of the year is caused by an increasing demand for labor services, as the jobless rate declined by nearly a full percentage point and the number of unemployed fell by 1.2 million.
Will this evidence move the Fed to begin its process of "normalizing" interest rates?
It should. But if that is not enough, here are a few more issues to show that the U.S. monetary policy may soon have to begin its long journey toward a neutral position.
The first thing to note is that a sustained increase in hourly compensations is signaling rising demand-supply imbalances in U.S. labor markets. Since last August, for example, the recorded unemployment rate has been steadily moving below its structural level of 6.1 percent, reaching 5.8 percent in October.
That structural unemployment rate is based on the long-term trend growth of the economy (aka "potential growth rate"). Its more complicated technical names are "non-accelerating inflation rate of unemployment (NAIRU)" and a "full employment unemployment rate."
Hitting the speed limits?
Put more simply, October's 5.8 percent unemployment rate implies that the U.S. economy is operating above its non-inflationary potential, and that it is beginning to hit its physical limits (in terms of labor and capital) to growth.
It certainly looks that way. America's 2.3 percent economic growth in the first three quarters of this year is 0.4 percentage point above the potential growth rate of 1.9 percent estimated during the post-crisis period from 2009 to (and including) 2013.
Capacity strains in the U.S. economy look much stronger if the growth potential is approximated as a sum of growth rates of labor supply and labor productivity over the same five-year period. That gives a potential growth rate of 1.56 percent and indicates that the U.S. economy is now running 0.74 percentage point (2.3-1.56) above its non-inflationary growth capacity.