Are Labor Costs Really Rising ?

I mentioned yesterday that I found two recent pieces of government data unbelievable:

• I don’t believe housing prices are holding up;

• I don’t believe Labor Costs have risen appreciably.

That Labor Department report that pressured equities the past few days? I did not buy into the idea that unit labor costs had surged in Q1; Neither, apparently, did Floyd Norris:

"Robert Barbera, the chief economist of ITG, points out that the driving force in that change was a revision in the figure for growth in wage and salary income. And while you may think wage and salary income is just that — the money you get directly from your employer — the government also includes the profits people make from cashing in stock options.

“It almost certainly was a consequence of an explosive exercise of options,” Mr. Barbera said.

When the government first estimated the first quarter figure for growth in wage and salary income, it came up with an annual rate of 7 percent. That was reasonable based on the data it had, which come from the monthly employment numbers. But since then it has gotten real data, which led to the increase.

The stock market struggled late last year, and then rose nicely early this year. What this almost certainly means is that a lot of people cashed in their stock options. That is good for them, but it is not a sign of inflation."

In Q1 of 2000, wage and salary income grew at a rate of 15 percent, but then fell to 2 percent in the second quarter, also based upon the exercise of options.

ITG’s Mr. Barbera notes that the pace of options exercises slowed down in Q2, and the annual growth rate of wage and salary is below the original estimate of >7%.  He estimates it at only 1 to 2%.

Isn’t that just like Wall Street?  After denying that inflation exists for 4 years, they finally see it — precisely where it isn’t — in wages and salaries . . .


Inflation Sign? Don’t Bet on It.

Floyd Norris
Norris Blog, September 7, 2006,  12:01 pm

Labor Costs Shake a Pillar of Fed Policy   
NYT, September 7, 2006

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What's been said:

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  1. Jdamon commented on Sep 8

    I will tell you that I have hired 5 folks in recent weeks and they are all getting about 5 – 7% more than we had budgeted for. What is happening is tighter labor market as boomers opt out of workforce/retire, plus not nearly as many 25 – 39 year olds as there were boomers, plus everyone is trying to get extra $$’s to cover gas costs. I have had 3 candidates tell me as such. I absolutely believe labor costs will rise over the next 6 – 12 months. Not enough to fuel ultra high inflation as these raises are just to get most folks even.

  2. Cherry commented on Sep 8

    and I tell you, what makes you think this labor market is tight? I don’t see it and you believe the press.

  3. Bob_in_MA commented on Sep 8

    If you look at the figures for nonfinancial businesses, it bears out the idea that things like options have a lot to do with the main, nonfarm business numbers being so high.

    The difference between the set of numbers seems absurd. I understand they’re calculated totally differently, and that the Fed tends to look at the nonfinancial numbers closely.

  4. Ryan commented on Sep 8

    I’ve seen a large jump in labor costs over the past couple of years, at least for software engineers in the Bay Area. The market for good developers is very tight, many are getting pay raises of 10-15% when they switch jobs.

    It almost makes you want to move to a different part of the country where wages are not through the roof.

  5. Estragon commented on Sep 8

    Interesting, but I’m not so sure I’d dismiss the wage growth quite so fast. Safeway gives not a rodents behind where I get my cash. A buck is a buck.

    Granted, there’s an issue of sustainability of options or bonus source income in a downturn, but somehow corporate execs seem to get the $$ in good times and bad.

  6. Jdamon commented on Sep 8

    Cherry, just tried to explain to you that I have actually been hiring/looking to hire and finding good people is both harder and costing more money than 6 months or a year ago. I am looking at hiring white collar, educated people (not housing market day laborers), so maybe if I was a general contractor things would be different. At a bare minimum, demographics are going to drive up wages over the next 10 -15 years. That is a fact.

  7. M.Z. Forrest commented on Sep 8

    Anecdotal evidence is often the worst evidence.

    As for wage growth accelerating in the next 10-15 years, I would be shocked. The Boomers are a large generation certainly. We still don’t have a negative birth rate, and we still have net positive immigration, legal and otherwise. Despite wide spread belief, the boomers leaving the labor market is not going to shrink the aggregate labor market.

  8. Blissex commented on Sep 8

    «“It almost certainly was a consequence of an explosive exercise of options,” Mr. Barbera said.»

    I wonder whether that is related to the in-the-money backdated options story. All those options probably have been restated as income for tax purposes.

  9. Jdamon commented on Sep 8

    Forrest, the boomers retiring WILL shrink the white collar work force most definately. Nice wording about the overall labor market, but as you and I both know, the immigrants are highly skewed to low paying, unskilled labor. Not many boomers doing that work now anyway.

  10. ~ Nona commented on Sep 8

    Jdamon, I’m hearing the same thing from other people who are hiring.

    One friend budgeted for $60K for one professional’s salary. Now she worries that she may have to go beyond $80K. She’s already been forced to go a little higher on everyone else. Reason? It has been — and apparently is — challenging to find the skill sets she needs.

  11. Cherry commented on Sep 8

    Your explanation is micro and not a picture of the whole.

    In my business, we were begging badly for people(young college graduates mostly) in 1999 because we had a major shortage. Not today, it isn’t close. We can pick and choose at will.

    JDamon and Nova, your examples are certain skills, not a picture of the labor market as whole, which is pretty neutral right now.

  12. royce commented on Sep 8

    Isn’t there a statistic for hourly wages? That would seem to be a better indicator for gauging costs in the broad labor market.

  13. donna commented on Sep 8

    Sounds like some companies and employers here are hiring skill sets and not people. Always a bad mistake. Certainly the right skill set for any particular job is hard to find. But instead of encouraging employees to stay companies allow them to go elsewhere to get their higher salaries. Much, much cheaper in the long run to pay people what they are worth in the first place. Consider what value the job itself is adding for you, and pay accordingly. Stop trying to hire cheap, and you’ll find people aren’t hard to find at all. Keep looking for “someone who knows x software package” and you’re right, they’re hard to find.

    Training is a lot cheaper than you think.

  14. Bluzer commented on Sep 8

    JDamon –

    Can I ask which part of the country you are hiring in? Things seem to be tough (from an employer’s perspective) in the Bay area – but not quite that tough.


  15. kikboxer89 commented on Sep 8

    I work in Aero/Defense and I am seeing that all the knowledgeable people with 30 years specfic functional expert experience are retiring and going to work sub-contreact for smaller firms. The next level down does not possess the required knowledge because of all the downsizing since the early 90’s.
    There will definitely be wage competion for these type jobs. Example, today a 30 military contract expert retired, we have no back up and we are 40% muilitary.

  16. ac commented on Sep 8

    In my field I’m beginning to see strong upward pressure on wages due to a dire shortage of qualified professionals.

    However we are trying to fill positions that require highly developed technical skills and maturity via industry exposure.

    I don’t think this would have a noticable effect on aggregate wages… there are not many who posess these skills now, and there are just too few people in the US attempting to acquire and cultivate them. It seems that our culture does not promote this.

    And it makes me concerned about our ability to develop the type of wealth-producing/promoting technology that will keep us ahead of the curve in the future.

  17. Blissex commented on Sep 9

    «Reason? It has been — and apparently is — challenging to find the skill sets she needs.»

    «In my field I’m beginning to see strong upward pressure on wages due to a dire shortage of qualified professionals.»

    As a rule with very few exceptions (e.g. crane operators) that happens because hiring managers try hard to cover their backs by describing ”perfect profile” candidates, that have many skills plus experience and qualifications that match project requirements exactly.

    Indeed there is always a shortage of 25-35yo candidates with good Ivy Degrees, a masters, and who have 3-8 years of experience at a blue-chip competitor in exactly the same type of skills and job, and who are willing to relocate across the country and work for a ”competitive” salary.

    «Sounds like some companies and employers here are hiring skill sets and not people. Always a bad mistake. Certainly the right skill set for any particular job is hard to find.»

    It is not a mistake for the hiring manager and moreover what matters is not even an exact match for the job, but usually for the project.

    The ideal hire, from the point of view of a PHB hiring manager who wants to protect his career, is someone who was doing exactly the same job/project at a competitor until the day before. Trouble his, that is a fixed size pool, and a small one, because job descriptions tend to be narrower with time.

    To see the advantage for the PHB, suppose that the project fails (and most projects fail, and not just in the sw industry):

    * If the spec if merely for a ”good” candidate that does not match exactly the project, and it gets hired, the manager will be blamed for not having resourced the project correctly: ”if only you had hired the right people who could have hit the ground running from day 1…”.

    * If the spec is for a ”perfect” candidate, and no ”perfect” candidate has been found the manager has a very good excuse: ”the project would have succeeded if HR had found me the right resource, as it is I have been under-resourced”.

    In effect the hiring manager has a huge incentive to narrow the job spec to make it practically impossible to hire someone that matches it exactly.

    The end result of this is also that since there are very few ”perfect” candidates, companies then conclude that they should reserve them for ”strategic” supervisory roles and hire imperfect candidates only offshore, because then only price matters.

    Note: this applies mostly to ”cost centre” projects. For projects where the compensation and job security of the project manager depends on turning a profit, they are a lot less fussy, because what matters is not to justify the hiring and finding an excuse for failure, but hiring someone who gets the job done, perfect match or not.

  18. cm commented on Sep 9

    Blissex: Excellent summary. I’d add one other motivation for overdescribing credentials is that hiring managers don’t want to review many candidates, even if they genuinely seek a person. The idea is to get the perfect candidate with 2-3 screens/interviews, not 50. Understandable, but it doesn’t work.

  19. Lord commented on Sep 9

    Salaries could be increasing over expectations, but not be increasing at all. If someone with 3-5 years experience is sought but only someone with 10 years experience is found, the cost could well be higher than expected but not mean an increase in pay for the worker. At the same time, if more experienced workers are getting hired, then pay may be rising in aggregrate while not individually. The number of ads for masters with 3-5 years experience pretty much tells me we are far far from a tight job market.

    And no, boomers retiring won’t leave a worker shortage other than with a few firms that are overweighted with them. The population distribution is stabilizing, not shrinking. There will be more or less a constant level at a given age group. If your staff does not reflect the population distribution, that is your fault and it can be costly to fix. Perhaps you should have thought of that a long time ago.

  20. Lord commented on Sep 10

    The mapping between age distribution and management structure has never been very good and it has been getting worse with flat managements. Instead of 2:1.6:1.2:1 ratios of 20|30|40|50 year olds, the optimal distribution will be 1:1:1:1. Interestingly, the most appropriate hiring will now be a uniform rate combined with retaining the workforce over their lifetime. Surprisingly, lifetime employment may make a comeback. The difficulty will be with firms that need to expand or cutback rapidly because they will no longer easily be able to staff up the junior end and cut back the senior end. They will be better off staffing across the board. I don’t think management is ready for this since it means managers will have to start hiring more people older than themselves if they don’t retain them, something most are uncomfortable with.

  21. cm commented on Sep 10

    Lord: The goal, and result, of last century’s Taylorization-style efforts has been to make employers independent of individual talent, and transition to a “headcount” model. (I have seen the “management version” of a corporate presentation about the virtue of a certain process model, and this was explicitly spelled out.) I believe the rise in credentialism based on nominal skill definitions is a related phenomenon. Wherever it has not happened it has been largely because it is difficult to get the tacit knowledge/skill out of people’s heads and implement it in “workflow” (and in small entities, as Taylorization requires a minimal scale).

    This anonymization of the workplace will only end when it becomes infeasible at scale, and employers have to go back from hiring skill sets to hiring people. (For core staff. Specialty jobs have always been contracted out over the millenia.) I currently don’t see that, regardless of age distributions. In good part modern-day Taylorization is facilitated by “information technology”, which is there to stay. 18th/19th century industrialization has not been rolled back either.

    What do you think?

  22. cm commented on Sep 10

    Plus, there is a (perhaps increasing?) dichotomy between “design” (of product, workflow, service process) and “fulfillment” (production or rendering a service, using smarts/skill containing equipment where applicable). Taylorization has affected both, but the latter more so. One feature of this is that fulfillment has to scale with the size of business, whereas design tends to be more of a fixed-size activity, or at least has a smaller growth rate.

    As far as I can see, the obsession with youth is mostly in design, whereas I see a lot of older workers in fulfillment-type jobs. Perhaps there won’t be a demographic problem for employers, even if offshoring runs into limits.

    There are enough bodies and heads to fill a bounded number of design-type jobs, and fulfillment can continue to be automated. When I go to airline checkins these days, they have touch screens where you have to do everything yourself, and the airline personnel only hauls luggage and issues you the luggage receipt. In grocery stores, they have started introducing self-checkouts with one supervisor for 8 stations or so, and the remaining manned checkout now receives all the check writing customers, which is a problem for me as I refuse to use the self-checkout. In both cases “service” quality has degraded markedly, as a degree of proficiency has been removed from the workflow. But it probably does need fewer people to deliver that reduced service level.

  23. Lord commented on Sep 11

    The headcount model is dearly loved despite its dysfunctionality. Any job that can be performed by any employee shouldn’t be done by an employee at all. It should and will be automated away, so the only fulfillment jobs that remain will be those too difficult to automate. Design jobs will be highly prized and rewarded but will be in short supply. It is youth obsessed but this may fade somewhat as youth become more expensive and the customers become older. It may call for more experience as to what has been done before, what works and what doesn’t, and what is desired. Youth may propose and age dispose.

  24. ~ Nona commented on Sep 11

    Cherry, I think you’re right. Here are new anecdotes, all real; all true:

    I just spoke to one professional who is considering a job at literally a tad less than one-half the salary she once earned.

    Another professional has taken a position (actually, I made the connection) for 60K — and she’s used to about 90K.

    A third professional is pleased to have landed a part-time position that pays her 20% less than the “going” rate.

    So it does depend….

    ~ Nona

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