Wage Gains: Good and Not

Wages have begun to accelerate.  According to the Labor Department,  hourly compensation in this economy has risen faster than inflation for ten of the last twelve quarters.  For those who care for the American worker or economic or social stability, which aught to be just about everyone, this is a welcome development.  But the detail shows how the trend toward wage gains has a down side.  Though rising wages will create a welcome advance in household incomes and so help sustain economic growth, they will also raise costs to businesses and so inhibit the investment spending necessary to sustain an economic advance over the longer-term.  Nor can these gains even begin to answer the fundamental issue of widening income inequalities.  On net, the picture suggests that the long expansion (since 2009) is entering its ultimate stage.  It is not the end of the expansion to be sure, but it is the beginning of the end.

There is no denying that in many respects these wage gains are welcome.  The accompanying exhibit makes clear what a change they make from the disheartening picture that preceded them.  The contrast is most clear in the annual averages.  Wages were more than keeping up with inflation in the last years of the previous expansion, 2007-08, but after the recession took hold and rising rates of unemployment had their effect, matters for the wage earner deteriorated.  The 2012surge in hourly compensation might have given hope that wages would catch up from recessionary losses, as they typically do in recoveries, but that sense of improvement was disappointed in the poor performance of 2013.  It was only later in that year and subsequently that quarterly wage growth, except for 2014’s second quarter, has either kept up with rates of inflation or exceeded it.

On the favorable side, such increased rates of compensation will translate into higher levels of household income.  This, even with Americans’ recent enthusiasm for saving, should support a rise in consumer spending.  And since consumption constitutes fully two thirds of the country’s gross domestic product (GDP), the increased flow of household spending should sustain the pace of recovery if not accelerate it.  But this is all the encouragement the Labor Department’s report has to offer.  In particular it shows that the working man and woman, far from a higher rate of pay, are mostly working longer hours to get the additional income.  Questions of income inequality, which have taken center stage in this year’s election campaign, are not going away.

According to the Labor Department, hours worked in non-farm American businesses have increased at about a 2.0 percent annual rate during this period of improving hourly compensation.  To the extent that increases in total hours reflect more hiring, it points to an improving economy, but to the extent that they have developed because of more overtime, it suggests that the increase in hourly compensation simply reflects the time and a half hourly workers get from an extended workweek.  Other Labor Department figures imply this is no small part of

 

Change in

Average Hourly Compensation

Non-Farm Business[*]

 

 

    1Q   2Q 3Q   4Q Ann. Avg.
2007 10.2  -0.1 1.3   4.4 4.0
2008   4.0   0.3 3.5   4.4 3.1
2009  -9.6 10.2 2.8   2.4 1.6
2010  -2.7   4.8 1.9   1.8 1.5
2011   7.3  -2.2 2.5  -4.8 0.7
2012   9.7   2.2 0.2 10.9 5.8
2013  -9.0   5.9 0.9   2.5 0.1
2014   5.9  -1.3 3.3   3.9 3.0
2015   1.8   5.2 2.3   3.6 3.3
2016   3.9        

*Compound annual percent change.

Source: Labor Department

the picture.  They report that since 2009 the average workweek has expanded from 33 to almost 35 hours, an increase of almost five percent.  Overtime in manufacturing has gone from 2.8 hours a week to 3.2 hours, over a 14 percent increase.  To be sure, the additional pay counts as income and will support greater levels of spending, but procured in this way it hardly speaks to a general improvement in labor’s condition.

Meanwhile, a look at productivity figures makes clear that this fundamental situation will not likely improve over time.  Increases in output per hour are the only way industry can sustain increases in compensation above the rate of inflation.  And output per hour has hardly grown.  Typically, such productivity measures fall in recessions, when an overhang of unused capacity interferes with productive efficiencies.  That was certainly the case in this last great recession.  In 2008, output per hour declined a 3.9 percent annual rate during that year’s first quarter and a 2.5 percent rate during its last quarter.  But just as typically, recoveries quickly see productivity more than recapture their recessionary losses.  This cycle seemed at first to follow this pattern.  Output per hour rose almost 4.0 percent in the first four quarters of recovery from mid 2009 to mid 2010.  But then, unlike past recoveries, the rapid rate of advance halted.  The years 2011-2015 hardly saw any increases in output per hour.  This year’s first quarter, the most recent period for which data are available, saw an outright decline of 0.6 percent at an annual rate.  Though one quarter’s data is always suspect, it is hardly a good sign.

Nor is there reason to expect a favorable change any time soon.  Business and industry, in this sub-standard recovery, have shown a marked reluctance to spend on new equipment, technologies, systems, or structures.  And since only such spending can enhance output per hour, the increased compensation will squeeze profits.  For those who focus only on shares of the economic pie, it might look just fine for labor to take something from management, and it may make poetic sense, but a profits squeeze points to even less capital spending, still slower productivity growth, and so less likelihood that labor can improve its circumstances fundamentally.

Matters as they stand can go on for quite a while.  Especially with increased household income, there is every reason to expect this admittedly slow recovery to persist for the foreseeable future.  But the other signs among these statistics suggest that things are unsustainable.  These point to an end to expansion and the next cyclical correction.  This recovery has unfolded so slowly that it has managed to persist longer than the average.  Though a cyclical pause in economic growth is far from immanent, the signs, by signaling the beginning of the end phase, suggest that the next president will face a recession before his or her term ends.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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