Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / The Service Wage Premium Explained
Transcript
- Lucas: Look at the employment cost index for wages sitting at 179.0 right now. It tells a very specific story about where money is flowing in our economy today. Luna: And it’s not just about people getting bigger raises across the board. Where exactly is that pressure showing up most? Lucas: It’s concentrated heavily in the service sector. We are seeing a structural wage premium emerge for roles that require human interaction, which is driving up costs for consumers who can’t automate their way out of a haircut or a restaurant meal. Luna: So even if you aren’t working in services, your daily expenses are still catching that tailwind. Lucas: Exactly. And with the CPI at 336.3, that service inflation is becoming the anchor holding overall price levels up, regardless of what happens to energy or food. Luna: That’s a tough spot for anyone trying to stretch a paycheck this month. Lucas: If walking through the economics of your wallet has made something click, we deliberately don't run ads on these shows to keep the signal clean. If you want to support that choice, the link is buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Luna: We really appreciate the listeners who make that ad-free model possible so we can focus on the data. Lucas: Let’s get back to the numbers. The average hourly earnings for private workers are at 37.8, but that average hides the disparity between manufacturing and hospitality. Luna: Right, because the median usual weekly earnings have only moved up to 1,204.0, which feels stagnant compared to headline inflation. Lucas: That’s the core tension. When you look at the jobless claims near the lowest since the 1960s, employers are desperate. That desperation translates directly into higher wages for service providers, not factory workers. Luna: So the labor market is tight in ways that don't always show up in the broader unemployment rate. Lucas: Precisely. You have a low-fire trend continuing, which means turnover is down, but the cost of keeping existing staff is up. Companies are paying more to retain talent in customer-facing roles. Luna: Which means those higher wages eventually end up on your menu or your bill. Lucas: Absolutely. This is what economists call a wage-price spiral in the services component. It’s sticky inflation that doesn’t respond quickly to interest rate hikes. Luna: It feels like we’re watching a different economy than the one we read about ten years ago. Lucas: Ten years ago, global supply chains were the main driver of price changes. Now, domestic labor costs are the primary bottleneck. Luna: Does that mean the Fed’s toolset is less effective right now? Lucas: It certainly complicates things. When housing is flashing warning signs and the Fed weighs more interest rate hikes, they are fighting against a labor market that refuses to cool down in the service sector. Luna: I wonder if this wage premium will eventually spill over into other sectors as well. Lucas: It already is starting to see in healthcare and education. Those are service-heavy industries with aging workforces, and they are raising wages aggressively to attract younger workers. Luna: So the cost of care is becoming another invisible tax on household budgets. Lucas: That’s a fair way to put it. When you add insurance premiums to the mix, the total cost of being employed is rising faster than your take-home pay. Luna: It makes you question whether the gross salary increase actually buys you more freedom or just covers the new baseline costs. Lucas: For many families, it’s strictly the latter. The net gain in purchasing power is minimal when services dominate your spending basket. Luna: Are there any sectors that are actually benefiting from this dynamic? Lucas: Automation technology companies are seeing massive demand. If you can replace a service worker with software, you cut that recurring wage cost forever. Luna: So the solution to high service wages might be to hire fewer people, which feels counterintuitive for an economy trying to create jobs. Lucas: It creates a weird dichotomy. We want full employment, but we also want lower prices. The current data suggests we are prioritizing employment density over price stability. Luna: That trade-off seems unsustainable if the core PCE stays elevated. Lucas: With core PCE at 130.5, the Federal Reserve is stuck. They can’t raise rates enough to crush service wages without causing a recession in other parts of the economy. Luna: It sounds like a policy dilemma that could drag on for months. Lucas: And that’s why the 10-year breakeven inflation is ticking up to 2.34 percent. Markets are pricing in a longer period of sticky service inflation. Luna: Do you think workers will accept lower nominal wage growth if it helps stabilize prices? Lucas: Unlikely. With jobless claims so low, workers know they have leverage. They are going to demand the same percentage increases they got last year. Luna: So the cycle continues until something breaks, either wages or consumer demand. Lucas: One or the other has to give. But right now, both sides feel pretty resilient in their positions. Luna: It’s fascinating to watch how abstract indices like the employment cost index translate to the price of a cup of coffee. Lucas: That connection is tighter than most people realize. The next time you pay for a service, remember you’re paying for a labor shortage. Luna: A reminder that every transaction is also a vote on how much we value human time versus efficiency. Lucas: Exactly. And that valuation is shifting rapidly in our favor, but not necessarily in our wallets. Luna: We’ll have to see if that balance tips back toward deflationary pressures in the coming quarters. Lucas: It’s worth watching closely, because once service wages start to decelerate, the whole CPI picture could change overnight.