For years, even as the economy recovered and the stock market soared, most US workers saw little evidence of better times in their paychecks.
However, last month’s surprisingly large increase in both average hourly and weekly earnings, along with other encouraging data, has convinced many economists that falling unemployment and increased hiring are finally about to start paying off in terms of wage gains for a broader swath of workers.
“It’s the beginning of an uptick, and we should see it continue over the next year or two as the unemployment rate falls and the labor market tightens,” said Nariman Behravesh, chief economist at IHS, a private economics and forecasting firm. “You have to be careful, but my gut instinct is that this is the beginning of better wage performance.”
Illustration: Yusha
Still, even the seemingly good news for wages last month was not clear-cut. Although overall wages increased 0.4 percent — double what economists had been expecting — the gain for lower-paid workers in non-supervisory and production roles increased only 0.2 percent.
ECONOMIC DEBATE
Just how much the typical employee’s pay might go up in the months ahead — and whether most workers are likely to see significant gains or just a select few — is a key question in the economic debate facing Wall Street, academia, officials in US President Barack Obama’s administration and, especially, the US Federal Reserve.
On Tuesday and Wednesday last week, Fed policymakers held their final meeting of the year, followed by a news conference from Fed Chair Janet Yellen, where she provided further hints about when the Fed plans to begin raising short-term interest rates after keeping them near zero for the last six years.
[Editor’s note: Yellen said the Fed would take a “patient” approach in deciding when to bump borrowing costs higher and it was unlikely to hike rates for “at least a couple of meetings,” meaning April next year at the earliest.]
INFLATION
The nascent uptick in wages has prompted further warnings from the more hawkish members of the Fed’s policymaking council, who want the central bank to start tightening monetary policy sooner, rather than later, to ward off what they see as a potential threat of inflation.
However, Yellen and a majority of Fed policymakers, pointing to evidence that inflation remains well under the central bank’s 2 percent target, do not appear to be unduly alarmed and probably still prefer to leave interest rates as low as possible until the trend is better established.
“Until it is unambiguous, people can spin it any way they want,” Pantheon Macroeconomics chief economist Ian Shepherdson said. “One month is a curiosity, two months is interesting and three months is a trend.”
The split at the Fed is echoed in Washington, primarily along partisan lines. On Capitol Hill, some Republicans say it is time for the Fed to act, while Democrats in the Obama administration, like US Secretary of Labor Thomas Perez, say there is no rush.
“I welcome the point when my first concern when I get out of bed in the morning is having to address rapid wage growth,” Perez said. “I’m not too worried about inflation.”
As for the argument that the Fed needs to move sooner, rather than later, Perez said he “couldn’t reject that in stronger terms.”
“It’s time for the middle class and the aspiring middle class to share in the dividends of their hard work,” he added. “The folks at the top end have been doing great and our prosperity hasn’t been shared.”
By contrast, Representative Kevin Brady, the Republican chairman of the Joint Economic Committee, has called on the Fed to move quickly, but even some conservative economists say the plunge in energy prices gives the central bank more flexibility this time around.
“Historically, inflation is something that gets out of the box because the Fed moves too slowly,” said Kevin Hassett, director of economic policy studies at the American Enterprise Institute and a former Fed economist. “But we’ve had a positive energy shock, so the Fed has ample room to wait and see.”
FALLING PRICES
In just the past month, average gasoline prices have dropped by US$0.25 to US$2.77 per gallon (4.4 liters) nationally, according to the federal Energy Information Administration, and more reductions are on the way as crude oil prices continue to fall.
If wages keep rising, the typical US family would have a couple of thousand more US dollars to spend next year.
Extended over the next year, last month’s 0.4 percent increase in average hourly earnings would equal an annual wage increase of nearly 5 percent, more than double the 2.1 percent increase recorded over the last 12 months.
“If the average is 2 percent, there are a lot of people getting next to nothing and 2 percent wage growth when corporate profits are skyrocketing makes people very angry,” Shepherdson said.
However, before anyone strikes up Happy Days Are Here Again, Shepherdson said that a previous 0.4 percent rise in wages in June last year was followed by no increase the next month. Similarly, the 0.4 percent gain in October 2011 also showed no signs of staying power.
POSITIVE DATA
What might be different this time is that the rise in average hourly earnings coincides with other positive data, including a fall in jobless claims, a declining unemployment rate and healthy hiring by private employers, as well as an increase in job openings, Shepherdson said.
On Monday, the Fed reported that industrial production in the US rose by 1.1 percent last month and also revised upward the increase for October. Overall, the new data showed factory output in the US has finally exceeded its pre-recession level.
Despite positive data recently, Fed policymakers have made it clear that they would not act on rates this week, or at their next meeting in January, but rather would wait at least until March and more likely June, at the earliest, economists said.
Although optimists like Shepherdson and Behravesh say the wage gains should become broader as unemployment continues to fall, professionals on the front lines of the labor market say higher-paid, better-educated workers with specialized skills are still getting the greater share of raises right now.
“What people want to see is 1999 or 2004, when companies were saying: ‘We’ll hire anyone,’” said Tom Gimbel, chief executive of LaSalle Network, a Chicago staffing firm. “That’s not what’s happening now.”
RISING SALARIES
Instead, salaries are rising in sectors in which experienced workers are harder to find, like technology, finance and higher-level accounting positions, and where salaries tend to be at least US$80,000 or more, Gimbel said.
For recent college graduates with liberal arts degrees, or workers in call centers and in data processing jobs, where yearly wages are less than US$50,000, “we’re bringing people in at the same salary as 10 years ago,” Gimbel said.
Gimbel added that new college graduates were still willing to take jobs they might have rejected in the past, like working in a call center.
“They figure: ‘The sooner I get a job, the quicker I can start paying off a mountain of student debt,’ and for guys working as a lifeguard or in the gym, a call center is white-collar experience,” he said.
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