The Federal Reserve wants your pay raise.

When Fed Chair Jerome Powell says “the labor market is extraordinarily strong,” what he’s really saying is too much good stuff for workers is making a mess of his inflation-cooling efforts.

The nation’s central bank is struggling to dampen the worst bout of inflation in four decades. Some progress has been made in recent months, but one of the Fed’s biggest headaches is that bosses continue to pay up for a limited supply of talent.

Look at pay patterns shown in recent California results from the government’s employment cost index, which tracks what bosses are spending on workers.

Southern California’s wages rose at a 5.9% annual rate in 2022’s fourth quarter versus averaging 5.7% in its first nine months, 5.6% in 2021, and 3.6% in 2016-2020.

Bay Area pay was up 4.5% in 2022’s final quarter versus averaging 4% in the first nine months, 3% in 2021, and 3.4% in 2016-2020.

‘Get back’

Pay hikes are a two-pronged problem.

Heavy demand for workers translates to soaring wages. And just like anything else a business pays for, labor expenses get passed along to consumers at the cash register.

Plus the fattened paychecks put cash in people’s wallets so they can pay for goods and services, keeping consumer demand high. California collected $20 billion in sales tax in the fourth quarter, up 6.5% in a year.

This sort of expansion is why Powell bemoaned steep labor shortages during a question-and-answer session Feb. 6. He compared current conditions to the equally robust business climate of pre-pandemic 2018-19 with inflation and raises in the 2% ballpark.

“We all want to get back to that place,” he said.

Who’s the “all” he’s talking about?

Paying up

Let’s have the trusty spreadsheet put the labor imbalance into a California perspective — not that this mismatch is unique to the Golden State.

Last year, California’s job market returned to its pre-pandemic strength. It surpassed 17.7 million workers for the first time as unemployment made a historic dip below 4%.

Those improvements came as bosses statewide struggled to remain fully staffed, according to a federal jobs report. California averaged 1.24 million unfilled job openings in last year’s first 11 months, up 23% from 2021 and a 76% surge from 2016 to 2020.Lansner » Page 11

So how did employment grow? Few bosses dared to cut workers.

California layoffs and firings were flat last year compared with the 2021 pace. And those forced departures were a stunning 65% below the 2016-2020 average.

Yes, it’s a worker’s job market. Only a boss — or a Federal Reserve chairman — would complain.

The bite

The Federal Reserve has two main chores: maintaining a healthy job market and keeping inflation moderate.

But it only has one tool — its ability to manipulate interest rates. So the central bank doesn’t deal with big-picture labor issues such as mismatched job skills or why some folks have left the workforce at an early age.

Last year, the Fed began to hike the interest rates it controls hoping to slow the shopping habits of consumers and the hiring patterns of employers.

Those increasing borrowing costs iced certain slices of the economy — notably real estate. And there’s been a noteworthy string of layoffs recently at technology companies. One reason behind these job cuts is tech stock prices have been hammered, in part, due to suddenly higher yields on safer economic bets.

But an overall strong job market pushes waves of cash through the California economy — even as government help for pandemic economic upheaval dries up and folks see investment profits wither as numerous financial markets sink.

And inflation’s bite makes the extra jobs and higher pay a less-than-profitable formula.

Consider that the consumer price index says inflation ran 7.4% in Los Angeles and Orange counties last year versus 3.8% in 2021 and a 2.6% average from 2016 through 2020. The Bay Area’s CPI showed consumer costs up 5.6% last year versus 3.2% in 2021 and 3% in 2016-20.

Basically, your past year’s raise went to the grocer or some other retailer. Or it settled an inflated utility bill or filled your gas tank. Or it paid for higher-priced services.

That’s why Fed officials, in an awkward kind of way, are proposing an economic trade: smaller pay raises for lower inflation.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com.