The Wages of Stagnation

Why are wages growing so slowly?

Source: Bureau of Labor Statistics

A couple of researchers at the Cleveland Fed have been studying this question. Why, at a time when unemployment has fallen from 10% to 5.5%, has wage growth been stagnant? In real terms, wages haven’t risen at all over the past five years—in contrast to how wages rose after previous recessions.

Cumulative change in compensation. Data for nonfarm business sector. Source: BLS and Cleveland Fed

Part of the answer has been low productivity growth. Over the past decade, productivity has only risen 1.4% per year. When productivity rises, labor is worth more, and employers compete for workers. So labor is worth less today. Combined with this is the effect of technology and cheap capital. With advanced software and ultra-low interest rates, it’s never been cheaper to borrow funds and buy a robot that can do the work of three employees.

Finally, globalization means that low-skilled and middle-skilled jobs are being outsourced. Firms can use temporary labor from developing nations to get clerical work done. This additional pool of labor may be depressing wages here. All this means that labor is getting a smaller and smaller slice of the economic pie.

Source: Cleveland Fed

Whatever the causes, there are signs that wages may start to pick up soon. Overtime is increasing—a process that can only go so far. Eventually, firms have to hire more full-time workers, which will put upward pressure on pay. Also, there is currently a record level of unfilled job openings. Filling those openings will push payrolls higher.

This means that profit margins may fall, even as total profit rises. Once we enter a virtuous cycle of rising wages leading to a stronger economy leading to more rising wages, the Fed should have no trouble returning interest rates to normal.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:22:42+00:00 July 15th, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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