Long a Laggard, Wages Start to Outpace Prices (NYTimes, 12/8/06)

December 8, 2006
Long a Laggard, Wages Start to Outpace Prices
By JEREMY W. PETERS and DAVID LEONHARDT
After four years in which pay failed to keep pace with price increases, wages for most American workers have begun rising significantly faster than inflation.
With energy prices now sharply lower than a few months ago and the improving job market forcing employers to offer higher raises, the buying power of American workers is now rising at the fastest rate since the economic boom of the late 1990s.
The average hourly wage for workers below management level — everyone from school bus drivers to stockbrokers — rose 2.8 percent from October 2005 to October of this year, after being adjusted for inflation, according to the Bureau of Labor Statistics. Only a year ago, it was falling by 1.5 percent.
In recent years, many Americans grew anxious about the future and economists questioned whether the recovery from the 2001 recession would ever produce genuine gains for ordinary workers.
The fall in unemployment to 4.4 percent and the recent surge in wages, however, raise the prospect that the job market could be on the brink of another strong run, much like the one that lifted incomes in the late 1990s.
“The labor market is pretty tight right now, so it’s not a huge surprise that we’ve started to see big wage gains,” said Nariman Behravesh, chief economist for the research firm Global Insight. “I think the big surprise is that it took so long.”
Still, there are a number of economic forces at work that raise doubts about whether the recent gains are the start of another boom. It is also possible, economists say, the improvement may turn out to be little more than a temporary spike.
For now, though, with the number of unemployed Americans actively seeking work at a five-year low, help-wanted signs are proliferating again and many businesses are having a harder time finding employees.
That means even lower-wage workers like Mercedes Herrera, an immigrant from Mexico who cleans at San Felipe Plaza, a high-rise office building in Houston, are enjoying more leverage with their employers. Last month, Ms. Herrera’s union, the Service Employees International Union, settled a monthlong strike and secured raises of more than $2 an hour over the next two years for some 5,300 janitors in Houston.
The pay of Ms. Herrera, a 37-year-old mother of four, will increase to $6.25 an hour on Jan. 1, from $5.65 now. “It’s going to be a big difference in my personal finances,” she said, speaking through a translator. With the extra money, she said, she hoped she would no longer have to ask for food from churches.
“We’ve always had to save for things that we have to buy,” she said. “We’ve had to create our own miracles in order to sustain ourselves.”
After years of stagnant, even declining real wages for the typical worker, the recent jump has also delivered a rare bit of good news for a White House coping with an unpopular war and the aftermath of the Democratic victory in the midterm elections.
The pay increases are “huge, even relative to a period that we think of as quite good,” said Edward P. Lazear, chairman of President Bush’s Council of Economic Advisers. “The question obviously will be, How long will it be sustained?”
That question will begin to be answered today when the Labor Department releases its monthly employment report. Forecasters expect the pay gains — which began in earnest in September, when gas prices sank — to extend into November.
But the economy has slowed significantly in recent months, and some analysts predict the housing slump will cause a further slowdown next year that will be a drag on incomes.
“The biggest issue is which direction the macroeconomy is headed,” said Jason Furman, an economist at New York University who served as an adviser to President Bill Clinton. “And there is probably a bit more uncertainty than usual about that.”
If wages rise for only a few months, the current expansion, on the verge of entering its sixth year of growth, would still stand out as an unusually bad one for workers — indeed, the only one since World War II without a sustained pay increase.
In the third quarter, which included the early weeks of the recent pay increases, the share of the nation’s economic output going to workers’ pay and benefits fell to its lowest level in 40 years, according to the Commerce Department.
Further, the average hourly wage for a worker in a nonmanagerial position, $16.91 an hour in October, was about the same as it was in 2003 when inflation is taken into account.
Some economists and incoming Congressional Democrats argue that economic trends like globalization and computerization have fundamentally altered the job market over the last decade or so. In this view, the solid pay increases of the late 1990s, stretching over multiple years, were caused by the technology bubble more than anything else and are unlikely to be repeated anytime soon.
“It’s a good job market, but it’s not the great job market it was back in the late ’90s,” said Mark Zandi, an economist with Moody’s Economy.com. “It was the tightest job market that, arguably, we’ve ever seen.”
At the height of the 1990s boom, the job market became so hot that Burger King was offering $5,000 bonuses to lure managers away from rival restaurants. The unemployment rate hit a low of 3.8 percent in the spring of 2000. Optimism among workers soared, according to polls.
In the exit polls conducted on Election Day last month, on the other hand, only 30 percent of voters said they expected life to improve for the next generation of Americans.
For now, however, paychecks are growing fatter in nearly every corner of the economy. Average hourly earnings for workers outside management grew faster than inflation in every major sector but manufacturing from October 2005 to October 2006, according to Moody’s Economy.com. For workers in leisure and hospitality, financial services and natural resources, for example, wages grew more than 4 percent, after accounting for inflation.
After years of sharply rising income inequality, the recent rise in wages also appears to be increasing pay for both rich and poor. From July through September, the inflation-adjusted hourly pay of workers near the bottom of the wage scale — those making less than 90 percent of all workers but more than the worst-off 10 percent — rose 0.1 percent.
That compares with 0.4 percent wage growth for those close to the top, those making more than 9 out of 10 other workers, according to an analysis of Labor Department statistics by the Economic Policy Institute. Wage growth for both groups is likely to pick up in the final quarter of the year.
Last year, inflation-adjusted wages of workers at the 10th percentile fell 1.8 percent, compared with a gain of 0.3 percent at the 90th percentile.
The most obvious cause of the recent turnaround is the fall in energy prices. Nominal wages have been accelerating since the beginning of 2004, but inflation, led by soaring gas prices, kept Americans from noticing any real rise in their pay during much of that time. Since the price of a gallon of regular gasoline peaked for the year at $3.03 in early August, prices at the pump have steadily declined. The national average is now down to about $2.29 a gallon.
That has taken a tremendous weight off wages, which finally started to outpace inflation in August. Inflation ran at a rate of 1.3 percent from October 2005 to October of this year, the lowest level since mid-2002. Earlier this year, inflation was running as high as 4.3 percent.
Wages have risen so swiftly that some economists worry that they could push inflation up on their own, by forcing companies to raise prices. Last week, the Federal Reserve chairman, Ben S. Bernanke, warned that the central bank might have to raise interest rates again. “One factor that we are watching carefully is labor costs,” he said.
The implications for higher inflation aside, Mr. Lazear, the White House economist, said he believed — and hoped — the trend would continue. “It’s not unreasonable to think that real wage growth will be sustained for a significant period of time simply because the labor market is so tight,” he said.
Workers — many having cut their savings and taken on more debt as wages failed to keep pace with inflation — would welcome that.
Alanzo Brown, who handles hazardous materials for a chemical company in Houston and recently completed a course that qualifies him for a raise, is expecting his pay to rise $4 an hour soon, to $19. At 29, Mr. Brown hopes to start saving more money so he can move from a rented apartment into his own home.
“I’m really trying to get into this saving thing,” Mr. Brown said.
Thayer Evans contributed reporting from Houston.