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September 5, 2006 > Column: Raise? What raise? No need for Fed to worry about wage inflation,

Column: Raise? What raise? No need for Fed to worry about wage inflation,

by ELLEN SIMON, AP Business Writer

NEW YORK (AP), Sep 01 _ Here's the rare piece of economic data you might check by looking in your wallet: Workers who don't work on a farm and aren't supervisors are making, on average, $22.69 more a week than they did last year, according to the Labor Department.

It's easy to dismiss the increases with a winking ``Don't spend it all in one place.'' But that raise is making some investors twitchy.

Year-over-year increases in average wages are the steepest since the summer of 2001. After 17 quarters of double-digit growth in corporate profits while wages stayed flat, average workers may finally get a scrap of the economic expansion now in its fifth year.

That's the good news.

The bad news is that wage increases could push prices higher. The Federal Reserve's biggest concern about workers while their weekly earnings were flat was whether they would keep spending enough money to power the economy. While core inflation remains quiescent, economists such as Bear Stearns John Ryding worry that ``tightness in the labor market and the rate of increase in average hourly earnings should continue to cause concern at the Fed about upside risks to inflation.''

John Lonski, chief economist at Moody's Investors Service, points to the gross domestic product report, the broadest measure of the economy. Wage and salary costs of non-financial corporations were up 9.7 percent from a year ago, according to the GDP report released Wednesday. That's the biggest increase since the fourth quarter of 1984. Total compensation grew by 9.3 percent year-over-year, also the steepest increase since 1984's fourth quarter.

Calling the increases ``amazing,'' Lonski said rising compensation costs should be a drag on corporate profitability. ``Unfortunately for workers, faster growth of wages could lead to unexpected cutbacks in hiring activity once business sales begin to slow.''

Not so fast, say the economists who think American workers are long overdue for a raise.

Higher benefits costs have increased total compensation costs without passing anything extra on to workers, they say. And higher prices for necessities such as gasoline have chipped into whatever wage gains workers have made.

``Wages have barely kept up with inflation and they certainly haven't gone up in response to the productivity improvements we've seen,'' said Bernard Baumohl, executive director of The Economic Outlook Group and author of ``The Secrets of Economic Indicators.''

``Companies have seen record growth in profits without really sharing that profit growth with employees,'' he said. Recent increases are ``not a sign of wage inflation; this is merely employees getting their due.''

The data backs him up. Workers made an average of $568.16 a week in July, according to the Bureau of Labor Statistics. Controlling for inflation, that weekly salary is a $1.57 less than it was in July 2002.

Baumohl argues that the GDP numbers showing such a sharp jump in compensation costs are skewed by bonuses for workers like lawyers and consultants.

``While there is certainly a population that benefits from bonuses, there's 80 percent of the work force that has, for years, seen no real income growth,'' he said

Said Nariman Behravesh, chief economist at forecasting company Global Insight Inc., ``Up until fairly recently, it seemed very clear that it was the high-end earners who were enjoying the fruits of this expansion, or mostly them.''

That the rest of the work force workers are only now getting a raise is ``ironic and it's unfortunate,'' he said. ``The timing couldn't be worse. Exactly the time workers are beginning to get some of the rewards of this expansion is when everyone's worried about inflation and the Fed is stepping on the brakes.''

All this raises a larger economic question: Why has it taken so long for wages to increase?

Many blame the declining power of organized labor.

David Rosenberg, North American Economist at Merrill Lynch points to a decrease in the number of work stoppages since March. ``This is a sign of an inflation-prone market?'' he wrote in a note to clients.

Another theory is that the labor market looks tighter than it really is because people who have been unemployed and haven't looked for work since the economic downturn are gradually returning to work. There were 448,000 ``discouraged workers'' in August, according to the Bureau of Labor Statistics, but they aren't counted as unemployed because they haven't been actively seeking work.

``If you look at the numbers on labor force participation, that participation rate rose very dramatically in the boom years, then went back down again,'' Behravesh said. ``People left because they didn't think the could get jobs.''

The return of discouraged workers to the job market helps keep the supply of workers greater than the demand for them, which, in turn, stifles further wage inflation.

Behravesh argues that when the economy was growing furiously in the late 1990s, droves of people who hadn't been working entered the labor force. When the economy slowed, they lost jobs and stopped looking for work. Those ``discouraged workers,'' aren't represented in unemployment statistics, which only count people who actively looked for work in the four weeks before the Labor Department's unemployment survey. Some argue that their absence leaves unemployment figures artificially low.

Now that the labor market is strong, discouraged workers are ``gradually coming into the labor market,'' Behravesh said.

There were 448,000 discouraged workers in August, up slightly from a year earlier, according to the Bureau of Labor Statistics. ``Discouraged workers were not currently looking for work specifically because they believed no jobs were available for them,'' according to the BLS. Another 1.1 million people were classified as ``marginally attached'' to the labor market and had looked for work in the past 12 months. They had not searched for work recently for reasons such as school attendance or family responsibilities.

Finally, competition from cheaper workers in India, China and elsewhere has depressed U.S. wages, said Joel Popkin, an economist whose consulting company specializes in wages and prices.

Popkin is not worried that higher wages will result in higher prices. He points to the number of jobs being created each month, which remains ``rather modest,'' in the low 100,000s. And the pay per hour worked also hasn't risen robustly either, he said.

Meanwhile, benefits are being taken away from workers or reduced, he said.

As Baumohl said, ``The Fed has to watch wage inflation, but there's no need for them to seriously respond at this point because there isn't any serious wage inflation out there. What you don't want to do is punish workers just when they're finally able to see some gains in real wages.''

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