Originally published on Reno Gazette Journal’s website, http://www.rgj.com/story/money/business/2015/03/06/rising-wages-wal-mart-precursor/24537471/
For the past 18 months, the labor markets have been telling us to be bullish on the U.S. economy as the healing in that market precipitated economic strength. Those who could read those signals had a significant time advantage in the markets, as those signs emerged months ahead of the now-official view of the Fed that the labor markets are healing. In fact, for several months, even into 2014, the Fed was using the “weak” labor market as the reason to keep its Zero Interest Rate Policy (ZIRP). (The February jobs data (+295,000), in the middle of another brutal winter, is just another sign of labor market strength.)
The Danger in Using “Averages”
Along those same lines, today’s excuse to keep ZIRP is a lack of wage growth. Somewhat at odds with the official view that wages are not rising is the fact that aggregate income in the U.S. has risen at a 4% annual rate for the last couple of quarters. Unfortunately, the Fed and the media use the “average” wage as the benchmark. This measure, however, can be very misleading depending on the distribution of the working-age population. In economies like ours and Japan’s, a working-age population skewed to the older cohorts (i.e., the baby boomers) can hold down the “average” wage, as older workers generally retire at the top of their wage scale, and they are replaced with younger workers at lower wage rates. Workers may actually be getting pay raises that don’t show up in the “average.”
Wal-Mart’s Preemptive Strike
While the Wal-Mart announcement that they would be raising base wages was great PR, it is properly viewed as a “defensive” move. That is, Wal-Mart has simply read the tea leaves, sees that finding qualified employees is difficult, realizes that it will have to raise wages to attract new employees, and more importantly, realizes that it must do so to keep its existing labor force. As the largest private sector employer in the U.S., Wal-Mart knows better than most how much labor turnover costs (i.e., the cost to hire and train a new employee). As a result, one should view Wal-Mart’s actions as a preemptive move to protect its existing labor force. And that alone says a lot about the near term future of wages in America.
Another force for upward pressure on wages has been the political move to capitalize on the so-called stagnation in the “average” wage. In the last year, we have seen many state and local governments opt to raise their legal minimum wage rates; in some places like Seattle, the minimum wage is going to rise as high as $15/hr. Upward pressure on prices is inevitable.
While Walmart has not acknowledged any of the reasons I enumerated above as their motivation for preemptively raising their wage rates, the following data leads me to such conclusions:
•The number of unfilled jobs was 5.03 million in December according to the Bureau of Labor Statistics’ February JOLTS (Job Openings and Labor Turnover Survey), a record level; this is significantly higher than the 3.91 million openings in December 2013;
•In December, there were 5.148 million gross new hires compared to 4.578 million a year earlier; again, significantly higher;
•Quits (“take this job and shove it”) were 4.886 million in December, quite a rise from the 4.468 million in December ’13;
•Layoffs have been trending down, indicating that businesses want to hold on to the employees that they already have;
•In the February survey of 716 businesses by the National Federation of Independent Businesses, 89% of the businesses which had job openings (which was 53% of those surveyed) indicated that they could not find qualified candidates.
Wal-Mart’s actions should be viewed as the “canary in the coal mine.” America’s corporate sector is going to have to raise wages, not to attract new, qualified employees, but simply to keep the ones they already have. That process appears to already have begun, with Wal-Mart as the poster child. In an economy with tight labor markets, it is normal for wages to rise, and for prices to follow (i.e., inflation).
Conclusions and Market Implications
The coming rise in wage rates will be good for America’s middle class. Of equal importance, higher wages will push the economy from moderate growth to strong growth. Despite some weaker data we have seen the last couple of months (due to another harsh winter for most of the country), economic growth appears ready to bounce once again in the second quarter, and get even stronger going forward. If I am correct, this has implications for equity prices.
It also has implications for monetary policy. Once the wage train starts to roll, it will be difficult for the Fed to slow it down. My view is that some cost-push inflation will result (rising wages leading to rising prices). That is the normal pattern. The current cycle appears to have been “abnormal” when it comes to wages (perhaps due to the way those wages have been measured). And, because of the wage issue, the Fed has been hesitant to move monetary policy back to “normal.” As a result, the Fed is likely to end up behind the inflation curve (again).
But, given the recent fall in the price of oil, cost-push inflation may still be many months away. Knowing the trend, however, can be very beneficial for investors (i.e., “the trend is your friend”). And it is even more beneficial for those who see it early.
Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, a Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee. Robert is available to discuss client investment needs. Call him at (775) 284-7778.
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