investors.com
Paychecks' Gains Slim For Most
BY JED GRAHAM
INVESTOR'S BUSINESS DAILY
As the economy surged last quarter and corporate earnings growth accelerated, a seven-month string of payroll declines finally ended.
But while renewed hiring in September helped ease fears that growth spurred by tax cuts would fade quickly, the consumer outlook doesn't hinge on job growth alone. Bigger paychecks are critical to a healthy recovery. As yet, they are missing from this one.
In September, average hourly earnings of rank-and-file employees dipped 0.1% from August, the first decline since May 1989. As a result, the annual gain in average hourly earnings fell to 2.7%, down from 2.9% the prior month and the lowest since May 2002.
Sharply higher health care costs, a business climate in which it's tough to raise prices and the shift of high-paying factory and service jobs offshore have combined to hold down wages and salaries, economists say. Meanwhile, business profits are getting healthy as economic growth rebounds and higher productivity lets firms meet increased demand with a lean work force.
"The combination of rising productivity and falling hourly earnings is great for earnings," wrote global investment manager Bridgewater Associates. "It essentially means that the benefits of productivity are accruing to the bottom line of companies instead of to fatter worker paychecks" as they did in the late 1990s.
One reason for slow wage growth is the type of jobs being created.
As payrolls grew by 57,000 in September, retailers and temp agencies added a combined 43,000 workers. But factories cut another 29,000.
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The shift helped bring down average hourly wages, since factories pay an average $650 per week compared with $373 for retailers and $579 for business services firms, notes John Challenger, chief executive of outplacement firm Challenger, Gray & Christmas.
"Many workers are being forced to take lower-skilled, lower-paying jobs," Challenger said.
Challenger found more reason for weak wage growth in the Labor Department's household survey, which begets the jobless rate.
The data, which can be volatile from month to month, showed unemployment among those with less than a high school degree fell from 9.4% in August to 8.6% in September. But the jobless rate among those with a bachelor's degree or higher rose to 3.2% from 3.1%.
Stephen Roach, chief economist at Morgan Stanley, sees a link between higher productivity, weak wage growth and the shift of factory and white-collar services jobs offshore.
The shift of labor-intensive work offshore "has the effect of biasing domestic productivity growth to the upside," Roach wrote.
And while outsourcing overseas has boosted efficiency, it's given rise "to a significant income leakage that already has had a material impact on household purchasing power."
Commerce Department data show wage and salary income in August was up just 1.8% from a year before, barely keeping ahead of inflation. But tax cuts pushed disposable income up 5.7% from a year ago and kept the consumer charging ahead.
Unless a strong job recovery ensues, Roach wrote, "there's good reason to doubt the sustainability of a recovery built on a foundation of imported productivity."
Much depends on what companies do with their productivity-driven earnings gains.
"In a healthy, self-sustaining recovery, increased consumer demand prompts firms to increase their own activities, including some combination of hiring, wage payments and investment in capital and inventories," said Ethan Harris, chief U.S. economist at Lehman Bros. "This creates a virtuous cycle: Higher spending begets higher income, begets higher spending and so on.
"If the productivity gains are recycled in the economy in the form of higher wages or increased business spending, the virtuous income cycle continues." But if they're used to improve balance sheets and boost savings, "the cycle is broken."
Another damper on wage growth is the surging cost of providing health benefits to workers. That's made companies reluctant to hire and more likely to use temp workers, who don't receive benefits.
In the second quarter, wages and salaries of private industry workers rose 2.6% from a year ago. That matched the fourth-quarter 1992 rise as the record low in the data, which dates back to 1976. Yet compensation costs overall rose 3.5%, led by a 6.1% jump in benefit costs.
As medical costs climb, firms have little flexibility to raise prices because of intense global competition and excess capacity in many sectors, says Gary Schlossberg, senior economist at Wells Capital Management.
"Out of necessity, businesses have to capture (their) productivity gains," Schlossberg said. "It really has been the only way of boosting profit margins and earnings."
As corporate pricing power "slowly stabilizes and improves," and with benefit costs likely to moderate as firms shift more of the burden of medical cost increases to employees, both hiring and wages should perk up, Schlossberg says. |
