Down Under Daily, 4 August 2015

Waiting For Godots Pay Rise

Signs of rising US wages are everywhere but in the Another possibility may be that aggregate wage
data. The weak June quarter employment cost measures are being damped by compositional
index reduces but doesnt extinguish the chance changes in employment. Exhibit 3 shows
of the Fed tightening at the September FOMC. employment growth by skill level in the US. The
Leading indicators still suggest that wages growth data for the current cycle are dated (current to
should pick up in this half year. Moreover, weak 2012). However, its notable that there has been
productivity means that the tepid wages growth has disproportionate increase in low skilled workers
already capped profit margins. share of employment in this cycle compared to prior
periods. Presumably lower-skilled workers are
A broad range of indicators suggested that US wages paid less, so this mix-shift may damp observed
growth should accelerate this year. The quarterly aggregate wages growth.
employment cost index did pop in the March
quarter but then reversed in June. Wages growth Exhibit 3
may be lifting, but the lift is very modest (Exhibit 1). Low Skilled Workers Get Re-hired

Exhibit 1
Is That A Trend?
US LABOUR COSTS <= CURRENT CYCLE
5.0 * HOURLY EARNINGS ALL PRIVATE EMPLOYEERS WAGE & SALARIES FOR
5.0
CIVILIAN WORKERS WAGES EX INCENTIVE-PAID OCCUPATIONS
4.5 4.5

4.0 4.0

3.5 3.5
4 QTR %
12 M %

3.0 3.0

2.5 2.5

2.0 HOURLY EARNINGS* 2.0

WAGES (RHS)
1.5 1.5
EX-INCENTIVES (RHS)
1.0 1.0
1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Source: BLS, NBER; Minack Advisors Source: Why Are There Still So Many Jobs? The History and Future of
Workplace Automation, David H. Autor, Journal of Economic Perspectives;
Minack Advisors
One reason why wages seem to be defying signs of a
tightening labour market is that the natural rate of However, leading indicators of wages continue to
unemployment the unemployment rate where rise, suggesting that barring a slowdown in
wage growth lifts may have fallen due to economic growth wage growth will pick-up in
compositional changes in the workforce (Exhibit 2). coming quarters. Exhibit 4 shows a composite
leading indicator of wages.
Exhibit 2
A Lower NAIRU? Exhibit 4
6.5
NAIRU ADJUSTED FOR CHANGING LABOUR COMPOSITION
6.5 The Leading Indicators Are Pointing Up
WAGES AND WAGE INDICATOR
5.0 102
6.0 6.0
% OF LABOUR FORCE

4.5
101
4.0
5.5 5.5
3.5 100
WAGE INDEX
4 QTR %

3.0
5.0 5.0 99
2.5
CBO NATURAL RATE*
98
2.0
4.5 ADJUSTED NATURAL RATE 4.5
* CONGRESSIONAL BUDGET OFFICE SHORT-RUN NATURAL RATE. NATURAL 1.5 WAGES* (LHS) 97
RATE ADJUSTED TO REFLECT CHANGING DEMOGRAPHIC AND EDUCATIONAL MIX
OF THE LABOUR FORCE. BOTH SERIES INCLUDE FORECASTS. 1.0 WAGE INDICATOR
4.0 4.0 96
0.5
1982 1987 1992 1997 2002 2007 2012 2017 * WAGE & SALARIES FOR CIVILIAN WORKERS BUREAU OF NATIONAL
AFFAIRS WAGE TREND INDICATOR
0.0 95
Source: Declining labor force participation and its implications for 1986 1990 1994 1998 2002 2006 2010 2014
unemployment and employment growth; Daniel Aaronson, Luojia Hu, Arian
Seifoddini & Daniel G. Sullivan, Chicago Federal Reserve, NBER; Minack Source: BLS, BNA, NBER; Minack Advisors
Advisors

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Tuesday, 4 August 2015
The leading index is also consistent with signs that (Exhibit 7). (As an aside, the weakness in aggregate
marginalised labour supply as measured by the labour productivity is consistent with the apparent
gap between the headline unemployment rate and disproportionate hiring of lower-skilled workers
broader measures of labour supply has reduced through the current cycle. This may mean that
(Exhibit 5). compositional changes are damping measured
productivity, as well as measured wage growth.)
Exhibit 5
Falling Marginal Labour Points To Higher Wages Exhibit 7
4.5
WAGES AND SHADOW LABOUR
1 Productivity = 0 => Wages = ULC Growth
WAGES* (LHS)
DECOMPOSING US UNIT LABOUR COSTS
4.0 2 14 14

% OF LABOUR FORCE [INV]

SHADOW LABOUR [INV] NON-FARM BUSINESS SECTOR
HOURLY WAGES minus...
12 12
3.5 3 PRODUCTIVITY equals
10 10
UNIT LABOUR COSTS*
4QTR%

3.0 4 8 8

4QTR%
6 6
2.5 5
4 4
2.0 6
2 2

1.5 * WAGE & SALARIES FOR CIVILIAN WORKERS 7 0 0

GAP BETWEEN BROAD UNEMPLOYMENT (U6) AND
HEADLINE UNEMPLOYMENT (U3), INVERTED SCALE. -2 -2
1.0 8
1994 1998 2002 2006 2010 2014 -4 -4
* SMOOTHED (TREND OF GROWTH RATE)
-6 -6
Source: BLS, NBER; Minack Advisors 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: BEA, NBER; Minack Advisors

Whatever the outlook, the point remains that wage
growth, for now, remains modest. However, This has two important implications. First, if the
corporate labour costs which reflects the number trend of near-zero productivity persists it means
of workers as well as the pay for each worker has that current low nominal wages growth is actually
increased significantly. The growth in the real consistent with inflation heading towards 2%. Put
corporate wage bill now matches that seen at the another way, while wage growth may have fallen
peak of the prior cycle (Exhibit 6). short of expectations, unit labour cost growth is
now at a level consistent with the Fed expecting
Exhibit 6 inflation will rise towards its target range.
The Wages Bill Rises Faster Than Wages
REAL AGGREGATE PAYROLL & CORPORATE WAGE COSTS
8 8
Second, the rise in unit labour costs adds to
6 6
evidence that profit margins have peaked.
4 4
Corporate profit share of GDP has fallen for two
years; it is normal for turning points in the macro
12M%

2 2
profit share to lead turning points in reported
0 0
corporate margins (Exhibit 8).
-2 PAYROLL PAYMENTS* -2
CORPORATE WAGE DISBURSEMENTS
-4 -4
BOTH SERIES DEFLATED BY PCE DEFLATOR. LATEST MONTH Exhibit 8
ASSUMED FLAT. * PRIOR TO 2006 BASED HOURS, WEEKLY
-6 PAY OF NON-SUPERVISORY WORKERS -6 Peak Margins
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
US PROFIT MARGINS
Source: BLS, BEA, NBER; Minack Advisors 14 14
* AFTER-TAX PROFITS AS SHARE OF CORPORATE GDP
(4 QTR AVERAGE). S&P500 OPERATING MARGIN
13 13

Paying more for labour is no problem for business if 12 PROFIT/GDP* 12

labour is more productive. But heres the rub: 11 S&P MARGIN 11

% SHARE

10 10
labour productivity growth has stalled. Business
9 9
sector labour productivity growth has averaged 8
AVERAGE
8
around % per year over the past four years. 7 7

Consequently unit labour costs are now rising by 6 6

1% over the year to March quarter, even with 5

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
5

wages growth of only 2% over the same period Source: BEA, Bloomberg, NBER; Minack Advisors

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Tuesday, 4 August 2015
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Tuesday, 4 August 2015