Labor costs remained elevated in the fourth quarter and continued to drive gains in smaller firms. The gap between large and mid-sized firms widened, with larger firms now expecting labor costs to rise 5% instead of 5.3% over the next year. The slowdown in wage growth appears to be driven by a slowdown in wage gains at large retailers.
The health care sector has supplanted professional business services in expecting the most rapid acceleration in labor costs. Labor costs are now expected to accelerate the slowest in the retail sector. This is consistent with a sharp slowdown in holiday hiring and announcements of layoffs during the holiday season by major retailers.
This shift in the retail sector is notable as large retailers were driving wage growth and placed a floor on what smaller employers could pay low wage workers at the onset of the recovery. Now, those same large employers could be placing a cap on low wage pay. Our own survey suggests that the slowdown in wages is showing up in smaller firms; that suggest that the shifts we are seeing may be beginning to move downstream.
Raises among the lowest paid and entry level workers tend to filter up, pushing wages of managers up when they rise, and down when they slow. That is important to the Federal Reserve; the downshift in wage growth among retail workers could be a precursor to a broader slowdown in wage growth.
The share of costs businesses feel they can pass on to consumers held at 75%, the same as we saw in the fourth quarter. The pass-through is much greater for small firms than larger firms. The biggest shift was a broadening of the ability to pass through higher costs via rank and responsibilities.
In the third quarter, the C-suite stood out for its views on how much of input costs could be passed into prices. In the fourth quarter, the ability to pass costs along was more widely shared across title and responsibilty. This suggests that cost-push inflation could be becoming more entrenched, even as input costs are cooling. That is an outcome the Federal Reserve is attempting to avoid.
Larger firms are much better able to absorb costs than midsized and smaller firms, which could accelerate consolidation and market concentration among larger firms. This could undermine competition and make the economy more susceptible to bouts of inflation in the future.