Companies hired at a robust pace in May, but workers are still not expected to have seen much change in their pay checks.
Economists expect there were 188,000 jobs created and unemployment held steady at 3.9 percent in May, according to Thomson Reuters. But the pace of wage growth likely was at about 0.2 percent, or a year over year gain of 2.7 percent.
That wage number is seen as the most important part of the monthly employment report, expected at 8:30 a.m. ET Friday. It is a number that has frustrated the Fed and is closely tied to expectations for interest rates, in the eyes of the markets. A jump in wages to a higher, say 3 percent level, would imply to the Fed that inflation will be edging higher, and more interest rate hikes could be justified.
"That's the only number that matters really," said Aaron Kohli, fixed income strategist at BMO. The market continues to consider whether the Fed will raise interest rates three or four times this year, and that wage data could be a factor driving the argument for a fourth if it is higher than expected.
The Fed has forecast three rate hikes this year, and the second is expected to come at its next meeting on June 13. The market had been leaning toward a fourth rate hike this year, but that changed when political turmoil in Italy raised concerns about euro zone growth, and global growth.
The counterweight to risks like Italy is the fact that the U.S. economy is doing well and job growth is strong. "That's what June's [meeting] messaging is literally going to be about. How much do they emphasize these risks?" said Kohli.
But for now, the markets will be focused on wages.
Lewis Alexander, chief U.S. economist at Nomura, said wages have been rising, if only slowly. "Productivity is low and the other thing is labor market turnover is low. The turnover matters. It's one of the ways wages move up in aggregate is people change jobs," he said.
Alexander expects 205,000 jobs were added, up from 164,000 in April. That would keep job growth at an average 198,000 over the past six months, a pace Alexander said should continue.
"Vacancies are very high relative to the unemployment rate. It does suggest there's a kind of skills mismatch to some degree. I think the fact that overall productivity rates are low limits what companies are willing to pay," he said.
The Fed may have offered some clues on the wage picture in its beige book on the economy this week, when it said that companies are responding to the talent shortage by raising wages as well as in compensation packages. However, "wage increases remained modest in most Districts," the Fed said, adding that it does expect to see more wage gains showing up in coming months.
Diane Swonk, chief economist at Grant Thornton, said inflation is showing up, even if wages are slowly rising. "Its showing up in the pipeline inflation. It showed up in the Fed's beige book yesterday...prices are picking up faster than wages," she said.
The Fed pointed to costs rising from commodities like oil, steel and lumber. Swonk said potentially some companies might hold back on wage increases, if they are able, since they are taking a hit from other costs. She noted some of those commodities are in industries that have seen tariffs, like steel and lumber.
She expects to see 190,000 jobs added, and she sees wages rising 0.2 percent.
J. P. Morgan economists forecast 250,000 jobs, and they see 35,000 coming directly from the improved weather in May. They estimate 20,000 were added in construction.