Sluggish Wage Growth Has Been Good For Growth
Subdued growth in labor compensation has been a feature of the expansion that has attracted criticism from several quarters. Some have argued that this has restrained demand and the economic growth—we disagree.
We look at the labor market from a variety of perspectives including classical supply-demand, Keynesian, and incentives-based growth. Most empirical work shows higher wages reduce employment and this effect appears to have been rising over time.
Our focus is on aggregate profit margins and the central role that movements in this aggregate play in the business cycle. Wage increases that are not paid for by either higher prices or stronger productivity growth lead to lower profit margins—most profit margin squeezes have been followed by recessions and all recessions have been preceded by a margin squeeze.
Wage increases have run below our model-based forecasts over the last year. We think this has been a good thing for the economy. We were concerned in late 2016 about the unfolding decline in profit margins but these margins have stabilized and economic growth has strengthened significantly as the economy has added 2.5 million jobs over the last year.
Wage increases have, however, been gradually rising and the highest frequency measure, average hourly earnings, looks set to rise above 3% in the October employment report. Wages bear close watching.
The impact of higher wages on markets depends on the response of companies. The most positive is that higher wages reflect higher productivity. The most negative for bonds comes from higher prices and for stocks from a margin squeeze.
RDQ Economics provides global macroeconomic consulting services with an emphasis on U.S. economic fundamentals and monetary policy.
Our views are driven by consistent application of classical economic and monetary principles and has generated superior anticipation of changes in the stance of monetary policy and of movements in economic growth and inflation.
The founders of RDQ Economics, John Ryding and Conrad DeQuadros, have a combined experience of 26 years on Wall Street, 12 years of experience in central banking at the Federal Reserve and the Bank of England and nine years in the independent research space. John and Conrad have worked closely with fixed income, foreign exchange, and equity traders and portfolio managers, which has enabled their analysis and advice to be tailored to a clientele that is focused on trading and investment decisions.
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