Wage Growth Is Stuck in Neutral as Pay Gains Slow

Commuters head to work on a January morning in New York City. (YUKI IWAMURA/AFP via Getty Images)

The pace of gains in the cost of labor for U.S. employers remained steady during the second quarter—a positive sign for the fight against inflation but a potential negative for consumer demand.

A more balanced job market is aiding companies’ efforts to contain compensation costs as other expenses increase. There are no signs that pay is regaining momentum.

Compensation costs for all civilian workers in both private and government jobs climbed 0.9% during the three months ending in June, the Bureau of Labor Statistics reported on Thursday. That is the same pace of wage growth posted in the first quarter and in the fourth quarter of 2024, though it was a bit stronger than the 0.8% growth economists surveyed by FactSet expected to see.

Compared with a year ago, compensation climbed 3.6% in the second quarter, again in line with first-quarter growth. Economists expected a 4% increase.

The latest employment-cost-index data is in line with other wage metrics. Both the Atlanta Fed’s wage growth tracker and the Indeed wage growth tracker index have been pointing to slowing increases. Indeed’s index hit a new low in June.

The fact that gains in compensation costs are steadily slowing down may be good news for those concerned about tariffs triggering a wage-price spiral, but it is likely making consumers gloomier and more cautious in spending.

Driving the slower growth in pay is the fact that the labor market is broadly in balance and relatively few people are leaving their jobs. In fact, the rate of workers quitting dropped back to 2% in June, according to the latest Job Openings and Labor Turnover Survey. That lower figure implies that there will be weaker wage growth because “employers aren’t forced to pay up if people aren’t quitting,” wrote James Knightley, chief international economist at ING.

The annual rate of wage growth has gradually eased in recent quarters. It is now below the roughly 4% pace that is historically associated with the Fed’s 2% inflation goal.

Thursday’s data is further proof that labor markets aren’t a source of inflationary pressure, according to Sam Tombs, chief U.S. economist at Pantheon Macroeconomics. It indicates that inflation should return to the Fed’s target that once the tariff shock has passed, so long as productivity gains remain fairly steady, he said.

Regional Fed surveys of businesses also show that most employers aren’t expecting to dramatically increase wages through the end of the year.

“The low quits rate, the ongoing decline in job openings and the cost pressure created by the tariffs all suggest that businesses will seek to limit wage increases further over the next year,” Tombs wrote. “The chances of the tariffs triggering a wage-price spiral, therefore, remain remote.”

The employment cost index takes into account total labor costs, including wages and salaries, as well as benefits. Wages, not counting benefits, grew by 1% in the second quarter. That is an acceleration from the 0.8% pace in the first quarter, but the pace of pay growth has steadily cooled since hitting its peak in the second quarter of 2022.

Benefit costs only rose by 0.7% during the second quarter, compared with 1.2% in the first quarter, even though total spending on healthcare and insurance has been on the rise this year. Employer healthcare spending is projected to jump almost 8% this year, according to the 2025 Employer Health Care Strategy Survey.

With fewer people leaving their jobs and companies facing increased margin pressure, the odds are weighted toward “further moderation” in wage growth, wrote Bernard Yaros, lead economist at Oxford Economics. He projects wage growth will cool to an annual rate of 3.3% by the end of 2026.

Write to Megan Leonhardt at megan.leonhardt@barrons.com