Why Aren’t Raises Going Up?

Today’s job report was strong with 313,000 new hires. However January’s burst of wage inflation was a mirage, only 2.6% wage increases February. And that is before adjustments.

With 4.1% unemployment, why aren’t wages going up? The Fed Reserve keeps pointing to the Phillip’s Curve, which shows inflation should follow low unemployment. But it is not happening.

Alan Greenspan, Former Federal Reserve President is one of the critics of the Phillip’s curve. It predicts inflation, which does not appear. Paul Volker was another skeptic of the Phillip curve. The Federal Reserve’s issue may be they do not have a replacement model, and the appeal is low unemployment causing inflation is simple to understand.

Like most complex issues, there are several contributors to the problem. Believe the Federal Reserve is missing critical observations from their models:

The global economy and technology means companies can shop outside local neighborhoods and the United States for lower costs. My company is training engineers to outsource manufacturing planning to Russia and India. Unfortunately the planning quality has been poor to mediocre. Until recently high corporate taxes and low transportation costs have made moving manufacturing overseas desirable.

After 6 months of unemployment, you are no longer considered part of the work force. Many workers stayed in college, took social security, disability or retired early because of not being able to find work. These people are coming back adding to competition to find jobs.

There are 20 million people missing from the work force. Approximately the same number of people with drug convictions due to the War on Drugs. This hidden source of workers is beginning to rejoin the workforce.

The Federal Reserve has also contributed to lower inflation by keeping lending interest rates low. Companies have sure investments in low risk bonds with borrowed funds, rather than developing new businesses. Low inflation contributes to low wages.

Jonathan Tepper co-author of “End Game” and “Code Red”, wondered why a leading indicator for wages that had worked for decades stopped working since 2014. We are in a growing economy with a booming stock market. His article is on MauldinEconomics.com ‘Outside the Box’. His conclusions:

Companies are keeping more of the profits. They are rewarding investors with either dividends or stock buybacks.

Companies are able to keep more profits because of mergers and acquisitions have decreased competition. There are fewer companies with larger market share.

Many workers are living in non cities have limited choices which companies to work for. Combine that with weak Unions to negotiate higher wages.

US CEO wage gap inflation versus regular workers. UK CEO make 22 times average workers. US CEO make 276 times average workers. Less money to spend on worker salaries.

Do not see a burst of wage growth in the next 2 years for the reasons above. However the economy is strong, and wonder if the Federal Reserve has recognized they have finally created 2% inflation? Stronger inflation will increase wages until the next recession.