By Paul Hannon
Despite falling unemployment rates, there are few signs that
rising wages will soon start to push inflation higher in either the
U.S. or the U.K., where central banks are expected to raise their
benchmark rates next year and in early 2016 respectively.
In both countries, policy makers expect tightening labor markets
to result in a pickup in wages that will translate into higher
consumer prices, as businesses act to protect their profit margins
and as consumer demand strengthens.
But an internationally comparable measure of labor costs
released Thursday by the Organization for Economic Cooperation and
Development showed no sign of a buildup in inflationary pressures
from that source in either country.
Indeed, the Paris-based research body recorded a 0.1% drop in
unit labor costs in the U.S. during the third quarter, which
followed a 0.6% decline in the second quarter.
In the U.K., it recorded a 0.1% rise, marking a slowdown from
the 0.6% gain in the second quarter. In both cases, ULCs were
weaker than the average across the OECD's 34 members, most of which
are developed economies.
The Federal Reserve on Wednesday took a delicate step toward
raising short-term interest rates in 2015, but policy makers said
their decisions will be "data-dependent," meaning they will depend
on the path of the economy.
While the inflation rate has been below the Fed's target for
nearly three years, many officials believe that as labor-market
slack diminishes, inflation will move back toward 2%.
Wages did rise in both the U.S. and the U.K. during the quarter,
but in the U.S. productivity rose more rapidly. That means that
across the economy as a whole, the labor cost of producing a unit
of gross domestic product fell. In the U.K., productivity rose
almost as fast as wages.
In the minutes of their December meeting, released Wednesday,
the Bank of England's policy makers acknowledged that ULCs are not
yet rising quickly enough for them to be sure of meeting their 2%
inflation target.
"Further increases in pay growth, as labour market slack
continued to decline, would be required to be consistent with the
2% inflation target in the medium term," the minutes said.
By contrast, the eurozone registered no productivity growth in
the third quarter, following a decline in the second. So even
though wage growth was weaker than in the U.S. or the U.K., labor
costs rose more rapidly, albeit still very modestly.
But they didn't entirely rise in the right paces.
The eurozone's strategy for confronting its economic woe has
focused in part on what is termed an "internal devaluation," or
cutting labor costs in southern Europe, while hoping they rise in
northern Europe. Without the option of devaluing their currency,
that has been seen as the only way in which southern European
countries could regain competitiveness lost to their northern
counterparts in the decade after the euro was launched.
But while labor costs rose 0.7% in Germany, they increased just
as rapidly in Italy, and faster in Portugal.
-Write to Paul Hannon at paul.hannon@wsj.com