Significant wage increases may be on the way now that one measure of economic growth has caught up with the unemployment rate.
In fact, worker earnings could rise by as much as 4 percent in 2018 after years of lackluster gains, according to a trend spotted by Jim Paulsen, chief investment strategist at Leuthold Group.
Analyzing employment and wage trends over the past half-century showed that the unemployment rate, earnings and nominal GDP, or growth adjusted for inflation, are closely linked. In short, when nominal GDP is higher than the jobless rate, wages usually rise appreciably. In the opposite instance, which has been the case for most the current recovery, wage gains are harder to come by.
The equation could solve the most vexing issue for policymakers ever since the economy escaped the throes of the financial crisis-induced recession in mid-2009.
"Wage pressures have always responded to the unemployment rate but only in relation to the pace of overall economic growth," Paulsen wrote in a note to clients. "This simply was not an issue until this recovery, because economic growth was always strong enough to create wage inflation once the unemployment rate got low.