Pay Gains Are Lagging Inflation: Just A Blip Or Enduring Trend?
Investor's Business Daily Pay Gains Are Lagging Inflation: Just A Blip Or Enduring Trend? Wednesday November 2, 7:00 pm ET Laura Mandaro
Payday isn't what it used to be.
The economy has ticked along at a healthy 3%-plus growth rate for 10 straight quarters, unemployment has fallen to 2001 levels and corporate profits are running strong. But wage and salary growth has been sluggish.
When energy-fueled inflation is taken into account, wages actually are falling.
That's good news for employers because it helps profit margins. It also lessens the risk of a '70s-type "wage-price spiral," where higher energy costs fed into labor and product prices.
But stagnating wages don't help the consumer, especially when it comes to spending on discretionary items like vacations and holiday sweaters.
The savings rate has been negative for several months. Double-digit increases in home prices have let many consumers keep spending by tapping their equity. But there are signs that housing is cooling.
The conflicting signals from the overall economy and the job market have sparked some disagreement about the outlook for labor.
Now Or Forever?
Some economists expect wage growth to rebound in the next year as the job market tightens further, forcing employers to compete for workers. That trend would follow past cycles when wages rose after the unemployment rate dipped.
Others, however, see underlying shifts in the labor market, notably the increased use of offshore workers. The global economy's supply of labor has swelled by hundreds of millions as China, India and the former Soviet bloc have opened up.
Or as Don Hays of Hays Advisory wrote in his Wednesday investment briefing, "The global glut of hungry international workers ... keeps a tight lid on wages."
Meanwhile, private-sector unions continue to weaken.
Both factors suggest workers will get a smaller piece of the economic pie for years to come, they say.
"There have been significant debates about how much is cyclical and how much is structural," said Scott Hoyt, director of consumer economics at Economy.com.
The issue will likely get revisited again this week with Thursday's third-quarter productivity report -- which include labor costs -- and the October jobs report on Friday.
Global Competition
Past reports show wages rising modestly but not enough to offset higher prices. Blue-collar workers have felt this more so than college-educated employees, who have benefited from other pay like stock option compensation.
Wages and salaries rose 2.3% in the third quarter from a year earlier, the smallest gain since at least 1981, according to last week's employment cost index. That increase lagged consumer prices' 3.9% rise in the third quarter -- 4.7% in September.
"Increasingly, and moving up the education ladder, workers' wages aren't keeping pace with the price of products," said Catherine Mann, senior fellow at the Institute for International Economics.
If energy costs level off, inflation would likely cool, so real wages would show some modest growth.
The depression in wages comes as several large industrial unions have agreed to deep concessions. As their automotive and airline employers struggle to compete, they've had little choice.
"The combination of the global economy and offshoring puts pressures on companies not to raise wages, and then you have the decline of the union movement," said Edward Lawler, a professor at the University of Southern California's Marshall School of Business. "We've got two historical generators of wage-increases not occurring."
After auto parts supplier Delphi filed for bankruptcy earlier this month, management sought to cut hourly wages by two-thirds and slash the ranks of union workers. A few days later, United Auto Workers agreed to let General Motors (NYSE:GM - News) table some cost-of-living pay increases and shave $15 billion in retiree health-care liabilities.
Meantime, bankrupt Northwest Air (Other OTC:NWACQ.PK - News)lines reportedly will outsource some senior flight attendant positions. Attendants are mulling an interim pay cut of up to 25%.
Such anecdotal evidence, combined with official wage data, has bolstered the idea that this labor cycle is different.
"If you're not going to get wage pressure four years into the expansion, it does beg the question whether it will happen," said David Rosenberg, North American economist for Merrill Lynch.
He notes that the wage and salary share of overall national income has fallen below 46%, the lowest since the mid-1990s. In past cycles, unemployment has ranged near 6% when wages have made such a small part of national income.
But the current jobless rate is 5.1%. That's near what's been considered full employment.
Some economists argue there's more slack in the labor markets than the jobless rate would suggest, pointing to the relatively low labor force participation rate. They say that when unemployment drops further, wages could increase -- regardless of the dampening effect of globalization on some industries.
JPMorgan Chase expects the unemployment rate to hit 4.7% by year-end. As that happens, argues senior economist Robert Mellman, labor compensation should accelerate, including pay for low-income workers.
"When labor markets get a little tighter, maybe in the next nine to 12 months, labor will start to see its share of GDP going up," he said.
Mellman downplays the effects of globalization. That's because manufacturing, where workers are losing bargaining power, only makes up 15% of the overall economy.
Economy.com's Hoyt also expects labor markets to gradually tighten.
Globalization is affecting American jobs and wages "at the margin," he said. "The main driver is how tight labor markets are in the U.S."
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