Multi-Asset Insights

What's up with wages?

Mar 8, 2023

Quick read

  • Robust labor demand, low participation rates, and accelerating wages across the US, Europe, and Japan have raised the question: Will wage growth return to levels consistent with central banks’ inflation targets, or remain sticky at higher levels?
  • To answer this, we need to disentangle post-COVID restart effects from a potential structural change in wage dynamics. A detailed analysis of US household microdata helps to inform our view that wage growth has broadened across industries, is elevated across both job changers and job stayers, and appears set to settle structurally higher than in the previous decade.
  • In our view, structurally higher wage growth likely makes economies more resilient to higher levels of interest rates. In contrast to the “New Normal” post-Global Financial Crisis paradigm of more sluggish growth and inflation, we believe we are entering a period of “Old Normal” more akin to the macro environment of higher growth and higher interest rates that preceded the Global Financial Crisis. In our tactical multi-asset portfolios like the BlackRock Tactical Opportunities Fund, we have reflected this with short duration exposures and by favoring value over more rate-sensitive growth areas of equities.

Jay, we have a problem

The Federal Reserve knows that it has a wage growth problem. Jay Powell recently described a situation where “demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2% inflation over time [emphasis added].”1 Despite rapid monetary tightening in 2022, labor markets have continued to prove resilient and January’s employment and personal income data indicated no signs of a slowdown.

The US labor market of the past two years has, by many measures, been the tightest since World War II. In addition to a historically low unemployment rate, demand for workers has been exceptionally strong. A helpful way to visualize labor market demand is openings per worker (i.e., number of job openings divided by the total size of the US labor force). As shown below, we currently observe remarkably elevated demand for workers in the US.

Demand for US workers is historically high

Historical Fiscal Policy Growth

Source: BlackRock with data from Barnichon (2010) “Building a composite Help-Wanted Index,” Federal Reserve Bank of San Francisco, (prior to 2001) and BLS and JOLTS (from 2001 to February 2023).

This strong demand for workers is consistent with our previous comments on stimulatory fiscal policy and coincides with very weak labor supply and low participation rate.2 As any student of Economics 101 will know, low supply and high demand are combining to generate the outsized wage pressures that Fed Chair Jay Powell is so concerned about.

A new regime for wages?

To better understand the outlook for wages, we analyze the household microdata that underpin the labor market statistics. The Current Population Survey (CPS) is a timely and comprehensive survey of US households.3 For this application, it allows us to compute year-over-year wage inflation at the household level while also controlling for the industry of employment and whether the employee changed jobs.

The latest reading for economy-wide wage growth point to 6.6% year-over-year gains. More important than the exact level of current wage growth, however, are the time series and industry-level dynamics, which are shown below.

Our first observation is that the initial burst of wage inflation that happened in some of the most COVID-impacted industries, like Leisure & Hospitality. Employers had to pay up to lure workers back, which led to a fast and sharp acceleration in wages. This was a one-off effect on the way up, and we are currently experiencing a corresponding one-off deceleration. While these restart effects explain much of the recent softening in wage inflation, we believe this effect is unlikely to persist for much longer.

Wage growth is higher across all industries

Year over year wage changes

Source: BlackRock with data from US Census Bureau and BLS as of February 2023.

Should I stay or should I go?

In addition to understanding the cross-industry dynamics of wages, we also analyze wages for job switchers compared with job stayers. Based on the CPS data, approximately one-third of individuals who experienced a wage change are associated with a change in role or firm (switchers), which we view as distinct from wage changes for individuals in the same role (stayers). Over the last year the share of both switchers and stayers with year-over-year wage gains have jumped, but it is only by digging into the industry-level dynamics that we can gain a more detailed understanding.

In the plots below, we compare the average wage gains at the industry level across these two types of individuals. Focusing on Education & Health and Leisure & Hospitality highlights how job switchers typically lift all boats; individuals typically change roles to receive higher pay. However, the level of wage growth amongst job stayers is also currently materially higher across all industries compared with pre-2020 levels. This is likely the more important series to watch going forward since the elevated wage growth amongst job stayers boosts overall income growth across throughout the US economy.

Both job switchers and job stayers have experienced wage increases

Six month rolling average

Source: BlackRock as of February 2023. Graphs use a 6-month rolling average.

What do these views mean for portfolio positioning?

In our tactical multi-asset portfolios like the BlackRock Tactical Opportunities Fund, we seek to deliver diversifying returns that are lowly correlated with stock and bond markets. We do so primarily by seeking out relative value opportunities across different countries in both stock and government bond markets.

Our insights on wage dynamics and the US labor market lead us to position portfolios for structurally higher government bond yields which will be needed to combat persistent and widespread inflation pressures. We remain short duration in developed markets and have shifted our equity exposures to favor value over more rate-sensitive growth areas.

Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to for most recent month-end performance.

To obtain more information on the fund, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please visit Tactical Opportunities Fund.

The Morningstar RatingTM for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

Tom Becker
Portfolio Manager, Global Tactical Asset Allocation Team
Tom Becker, Managing Director, is a portfolio manager on the Global Tactical Asset Allocation (GTAA) team within BlackRock's Multi-Asset Strategies & Solutions group. The GTAA team manages multi-asset macro investment strategies including the Tactical Opportunities Fund and Sustainable Balanced Fund.
Fiona Sloof
Macro Research and Portfolio Strategy Team, Multi-Asset Strategies & Solutions
Fiona Sloof, Vice President, is a member of the Macro Research and Portfolio Strategy team within BlackRock's Multi-Asset Strategies & Solutions group. The team is responsible for coordinating research and portfolio strategy across the multi-asset investment platform - including global economics, asset allocation and portfolio construction.