The workers’ share of GDP is at last back where it was before the financial crisis, Ken Brown announces in this article in today’s Wall Street Journal
While sophisticated investors debate the finer points of negative interest rates and agonize over the timing of the next rate increase, the rabble outside the gates might be the thing that upends the stock market.
U.S. businesses are facing a problem that many haven’t thought about in years—rising wages. That could be one factor that tips over a market that has the uncomfortable combination of declining earnings and high valuations.
Workers, for the first time since the financial crisis, are demanding raises and actually getting them—or they are walking.
The number of workers quitting jobs has increased, a sign they are confident they can get new jobs, and companies are loath to lose good workers. It now takes 27 days to fill a job, the highest since at least 2001, according to Deutsche Bank . Just 32 companies announced layoffs in the first quarter, the lowest in seven quarters, according to Bank of America Merrill Lynch.
The workers are getting support from politicians. At least 15 states have raised the minimum wage this year, some as high as $15 an hour.
This shift in favor of labor, however small, comes at a time when most investors are focused elsewhere, though the market is vulnerable to even a slight disappointment in fundamentals.
The rise in wages is a long time coming. Wage growth after the recession was the slowest in 50 years, according to Goldman Sachs Group Inc. One of the most dismal statistics from the financial crisis was the share of gross domestic product going to workers, which hit 52.5% in 2011, its lowest level on record. With the job market weak for years after the recession ended, that number didn’t move much.
It has since risen two percentage points, back to where it was before the financial crisis. No one believes it will go back to levels of previous decades when growth rates were healthier, unions stronger and inflation higher. But after adding eight million jobs in the past three years, wage pressures are stronger, which could slow job growth.
“More revenues are going into the pockets of workers,” said Brian Schaitkin, a senior economist at the Conference Board, a corporate-research organization. “Higher wages are going to place downward pressure on corporate profits.”
Average hourly earnings grew 2.5% in last week’s jobs report, higher than many investors appear to be accounting for. Wage growth is still below history’s 3.1% mean growth rate, according to Goldman Sachs, but in some industries wage pressure is stronger.
Unlike most stats that investors agonize over, these numbers actually matter in the real world. Low wages relative to GDP mean that a bigger portion of revenues goes to the owners of businesses rather than the workers. That further widens the gap between rich and poor, which was growing long before the recession.
The gap was made worse by central bank easing, which by its nature drives up prices of assets such as real estate, stocks and bonds, which are more heavily owned by the wealthy. The increases in minimum wages and the wacky presidential campaign can both be partly blamed on the gap.
On a macro level, higher wages could lead companies to hire fewer workers. That is one explanation for last week’s disappointing jobs number. In a Conference Board survey, more chief executives anticipate decreasing hiring rather than increasing it as costs rise.
Or, companies could eat the higher wages because they see better prospects for growth. That depends on whether workers spend or save their new-found cash. They didn’t spend their low-gas-price windfall.
In terms of profits, Goldman’s strategists believe that when labor costs are rising at 3% a year, then each extra percentage point of wage increase will cut earnings of companies in the S&P 500 by 0.7%. The sectors most affected by higher wages include restaurants, hotels, retailers, factories and health-care providers. TJX Cos., the parent of T.J. Maxx and other discount retailers, will boost pay this year to $10 an hour for all hourly workers who have been employed there for six months. Wage increases last year cut earnings growth by 2% to 3%, the company said. TJX reports earnings next Tuesday.
Goldman estimates that earnings at industrials would fall 1.2% for each percentage point rise in wages, while consumer-discretionary companies would decline 1.1%.
Wage pressures could become a new reality for businesses. A Conference Board study says the working-age population will grow at a historically slow rate through 2030, creating an overall tighter labor market. If wages do keep rising, one surprising winner could be energy, not only because higher-paid workers are more likely to buy massive SUVs. The industry is one of the least labor intensive, so even if oil prices stay low, energy companies may start to look good.