Why raises for lowest-paid workers could lead to interest rate hikes

ATLANTA - From the drive-through clerk at McDonald's to the greeter at Wal-Mart, unskilled workers are getting raises, signaling a broadening of labor market gains that could give Federal Reserve Chair Janet Yellen reason to begin raising interest rates this year.

Average hourly earnings in industries paying less than $12.50 an hour a year ago rose 3.2 percent in the 12 months through April, about 1 percentage point more than wage growth for the job market as a whole, according to Goldman Sachs.

This development may be the start of a long-awaited catch- up for lower-wage workers, who suffered disproportionately during the recession and recovery. It is being driven in part by state governments raising their minimum wages, and also through voluntary decisions by companies to raise employees' pay.

The Fed has been looking for evidence that improvement in the labor market isn't just confined to jobs in high-paying industries requiring specialized skills. Policymakers see continued wage increases as bolstering consumer spending and helping bring inflation up to the Fed's 2 percent target.

"The Fed probably finds it encouraging that even the less skilled segments of the population are seeing wage gains," said Roberto Perli, a former Fed economist who is now a partner at Cornerstone Macro in Washington. "It's another sign that slack in the labor market is diminishing."

Central bank leaders will get another read on the job market on Thursday, when the government issues its monthly payrolls report a day earlier than usual because of the U.S. Independence Day holiday.

Employers probably added 230,000 jobs in June, above the monthly average for 2015, and the unemployment rate dropped to 5.4 percent from 5.5 percent, according to the median forecasts of economists surveyed by Bloomberg News. A report issued on Wednesday from ADP Research Institute showed companies boosted payrolls in June by 237,000 positions, the most in six months.

The declining unemployment rate doesn't provide a complete picture of the job market, Yellen said in a news conference on June 17.

"There appear to be unusually large elements of slack," she said. Among them: Some 6.7 million Americans were working part-time for economic reasons in May, well above the 5.5 million average since 1995.

Yellen cited "tentative signs of stronger wage growth. I think it's not yet definitive, but it is a hopeful sign."

Lower-wage workers suffered more than others during and after the 18-month recession that ended in June 2009. The unemployment rate for U.S. workers with only a high school education peaked at 11 percent and remained at 5.8 percent in May. For those with a bachelor's degree or more, unemployment peaked at 5 percent and has fallen to 2.7 percent.

Atlanta Fed researchers found the biggest wage gains following the recession went to full-time workers and those with college educations. Now, those at the low end of the pay scale are catching up, according to a new wage-tracking index that the Atlanta bank introduced this week.

"A lot of the wage increases happening now are going to people who basically haven't got a raise in five years," said Ethan Harris, co-head of global economics research at Bank of America in New York.

McDonald's announced plans in April to increase pay at U.S. company-owned stores by at least $1 above the local minimum wage. Wal-Mart earlier this year increased the pay of U.S. workers to at least $9 an hour. That was followed by pay raises at Target and TJX.

Raising wages has helped Wal-Mart retain workers and attracted more job applicants, Greg Foran, president of Wal-Mart's U.S. operations, said at a meeting with investors in June.

"That low-wage workers are getting bigger pay increases signals a broader acceleration in wage gains," said Mark Zandi, chief economist at Moody's Analytics in West Chester, Pennsylvania.

The Federal Open Market Committee repeated in June it will raise rates from near zero when there is "further improvement in the labor market" and it is confident inflation will return to the 2 percent goal. Zandi expects that in September.

The median estimate of all 17 FOMC officials' quarterly projections for the benchmark federal funds rate implied two rate rises in 2015. The number of officials forecasting fewer than two moves mounted to seven from three in March.

ManpowerGroup has started to see "some wage inflation" with broader demand for workers across industries.

"The hot skills are getting good wage increases and they have been for some time," said Jeffrey Joerres, executive chairman of Milwaukee-based ManpowerGroup. "We're starting to see some wage increases in general manufacturing jobs, service jobs, call center jobs, slowly across the board."

Some of the wage gains have been prompted by government actions. The minimum wage was raised in 20 states from Hawaii to Connecticut on Jan. 1, according to the National Conference of State Legislatures.

The gains by the lowest paid represent a turnabout as employers have offered increasing pay incentives for college- educated workers.

"For three decades, there have been long-term increasing premiums for education," said Enrico Moretti, University of California, Berkeley economist who has studied wages of workers by education. "I don't think this is a reversal but they are making up a little bit of lost ground."

• With assistance from Rich Miller and Erin Roman in Washington.