Rising Wages Deserve Your Full Attention

Sometimes, it takes a while for changes to work their way through the system to show up in the official data.

Case in point: Wage increases. Today’s jobs report confirms what we have been discussing during the past few years as wages in January rose 2.5 percent from the same period a year earlier. We have been anticipating an increase in wages, for numerous reasons, and they have been coming, if slowly. We could be on the cusp of seeing those gains accelerate.

Three factors have been behind this gradual increase: First, has been the overall improvement in the U.S. economy. Since the financial crisis, growth in gross domestic product has been slow, averaging less than 2 percent last year. And those gains have not been evenly distributed, either geographically or demographically. But the economy is becoming more normalized as we move further away from the crisis.

Second, with unemployment now less than 5 percent, employers are finding themselves with fewer hiring options. Today’s report saw the unemployment rate tick up to 4.8 percent (from 4.7 percent), but for a good reason: 76,000 more Americans entered the work force in January, sending the labor force participation rate up to 62.9 percent (from 62.7 percent in December).

Rising salaries are one reason for the increased participation rate, as the prospect of better pay draws more people into the labor force. As much as employers want to hold the line, competition for workers is intense, with market forces helping to drive wages higher.

Third, rising state minimum wages are increasing the overall income of the lowest economic strata. The National Conference of State Legislators reports that 19 states began 2017 with higher minimum wages:  Seven states (AK, FL, MO, MT, NJ, OH, SD) automatically increased their rates based on the cost of living, five states (AZ, AR, CO, ME, WA) increased their rates through ballot initiatives previously approved by voters, and seven states (CA, CT, HI, MA, MI, NY, VT) did so as a result of legislation passed in prior sessions. Washington D.C., Maryland and Oregon are scheduled to raise their respective minimum wages on July 1, 2017 due to previously enacted legislation.

The impact of this legislation on wages deserves special mention today.

Before 2015, the bulk of wage gains had gone to the top tier of earners. Analysts and economists have recognized that the impact of legislative increases in wage floors will affect how much of that distribution falls to the lowest-paid workers. A consensus seemed to develop late last year that 2017 wage increases would average about 3 percent. The Federal Reserve Bank of Atlanta wage growth tracker has been trending at about 3.6 percent. For January employment, Real Time Economics noted bank analysts are looking for modest gains in average hourly earnings. In 2016, average wages rose 0.2 percent a month.

Don’t be surprised if the minimum-wage bump turns out to be a significant boost later this year. Average hourly wages may begin to accelerate as the minimum wages work their way into the labor force. January is an off month — it’s the start of the new year, with lots of post-holiday layoffs and people returning from vacation. I suspect we might see a bigger wage impact in February and the following months, as there is a less severe seasonal adjustment, and as employers begin hiring.

Raising the minimum wage has multiple effects. For the lowest-paid workers, it is an obvious increase in compensation. This tends to boost the local economy, as these low-paid laborers typically spend their entire paycheck. The increase operates as a profit transfer from owners and investors to employees.

But it also has the potential to move other wages higher. Someone who has been with an employer for six months to a year, and previously received an increase or promotion, might be suddenly getting paid the same as a new hire. That could lead to demands for increases across the entire pay scale.

I have been saying for several years that we are witnessing a grand state-by-state experiment to see how higher minimum wages affect hiring, jobs, compensation and the local economy. The data so far suggest the positives outweigh the negatives.

This recovery has been underappreciated, unloved and different from the usual recession recoveries. But all the signs are there that wages are rising, steadily if slowly. With unemployment at 4.8 percent and with increasing labor force participation, we could see faster wage increases. This has the potential to be a very significant change. Consider what that would mean for inflation and the decision-making at the Federal Reserve in the coming year.

Rising wages deserve your full attention.1

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1.  We will skip for now my longstanding criticism that employers such as McDonald’s Corp. or Wal-Mart Stores Inc. have been gaming the system by making taxpayers subsidize their work force, which relies heavily on the social safety net. Our discussions along those lines can be found here, here, here, here and here.

 

Originally:  Be Patient. Pay Raises Are Coming. 

 

 

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