America’s workers may be finally in line for a decent raise.
After five years in which annual wage increases have averaged around 2 percent, salaries are set to pick up as a taut job market prompts more employers to boost pay to retain or add the workers they need, economists said.
“This will be the first time in a long time — and I’m talking a long time — that workers will see real wage inflation of some magnitude,” said Jonas Prising, chief executive officer of ManpowerGroup Inc., the Milwaukee-based staffing company with more than $20 billion in revenue last year.
That’s good news for Federal Reserve Chair Janet Yellen and her colleagues, who are counting on a tight labor market to lift wages and below-target inflation as they gradually raise interest rates. It’s less welcome for company executives and investors as higher compensation will eat into profits. Wages account for around two-thirds of companies’ costs.
“We may be seeing some incipient signs of faster wage growth,” Yellen said at a press conference on Dec. 16 after the Fed increased rates for the first time since 2006. There is “space for wage growth to be higher than it’s been.”
A steady fall in joblessness
Behind the anticipated rise in pay: a steady fall in joblessness to a seven-year low of 5 percent from a 26-year high of 10 percent in 2009. As a result, there are now 1.5 unemployed job seekers for every posted opening. That’s down from a 2009 high of 6.8 and is below the level that prevailed at the end of the last economic expansion.
“There is a more competitive labor market out there,” said St. Louis Fed President James Bullard, citing anecdotal evidence from around his district and talks with company executives on the bank’s board.
Company leaders “tended to think that 3 percent was a reasonable number for expected wage gains in 2016,” Bullard told reporters on Nov. 6. “There are a wide variety of businesses represented there, but they all said the same thing.”
Benefits of a tighter labor market
Some workers, especially those willing to switch employers, already are reaping the benefits of the tighter labor market. The quits rate, which shows the willingness of employees to leave their jobs, was 1.9 percent in October, up from 1.3 percent in 2009 and just marginally below the 2 percent average of the last expansion.
Financial adviser Davi Kutner said he received a “significant increase” in pay with the opportunity for more when he left his employer of 10 years in July for a new position at an Atlanta-based accounting firm.
“I really didn’t put myself out into the market,” said Kutner, 37, who is married and has three children. “I have networked with a few people and this opportunity came up.”
Supply and demand
Economists generally believe that wage pressures start to heat up when the economy achieves full employment as the demand for workers begins to outstrip the available supply.
Most Fed policymakers reckon the United States is just about there, based on projections they released on Dec. 16. Their median forecast of longer run joblessness is 4.9 percent, just below November’s 5 percent rate. Officials last week forecast unemployment would be at 4.7 percent at the end of each of the next three years, lower than previously estimated, showing they intend to run the job market a little hot to spur wage gains.
A broader measure of the job market, which includes part- time employees who want a full-time job and discouraged people who’ve stopped looking for work, also shows the supply of labor is shrinking. It’s fallen to 9.9 percent from 17.1 percent in 2009, the highest in data going back to 1994.
Full employment on that measure is about 9 percent and the U.S. should achieve that level around the middle of next year, according to Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
Untapped talent pools
To cope with the tightening labor market, employers are drawing from “talent pools that were previously untapped” by hiring Americans who have been out of work for a while, ManpowerGroup’s Prising said.
Some of the foreign forces that have held down salaries in the U.S. also may be waning as labor costs escalate overseas, especially in China, making it easier for American workers to seek higher pay.
Almost a third of manufacturing executives recently surveyed by the Boston Consulting Group said they would add capacity in the U.S. to meet demand there, up from about a quarter in 2013. One in five favored China, down from three in 10 two years ago.
Ravi Gandhi, co-founder of Hong Kong-based GMM Nonstick Coatings, said the company is considering building a plant in the U.S. to complement the facilities it already has in China and India.
“The idea of bringing manufacturing back to the U.S. is becoming more interesting because Asia is getting more expensive,” said Gandhi, whose firm supplies non-stick coatings for products such as kitchen cookware and bakeware.
Temper expectations
Most economists don’t expect wages to rise rapidly now that salaries are starting to stir. With economic growth moderate and worker productivity sluggish, companies will be reluctant to increase pay too much, until they’re forced to, they said.
Economic developments overseas also offer a cautionary tale. A 20-year-low unemployment rate of 3.1 percent in Japan so far has failed to lift worker wages significantly.
Still, some American companies are becoming resigned to having to offer their employees a better deal. In a survey last month by the National Federation of Independent Business, the net percentage of small firms planning compensation increases reached a nine-year high.
“Employers are increasingly aware that the labor market is tightening,” Prising said. “The pressure to raise pay is increasing.”
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