Rising wages would traditionally sound a warning bell for manufacturing companies, but a recent article in The Economist explores many positive aspects of the current surge in blue-collar wages in the U.S.
Stagnant wage growth since the financial crisis has not only been a reflection of poor productivity growth but also, many would argue, laid the foundations for the populist support which swept Donald Trump to power. The Economist notes that in the five years following the end of the recession from June 2009, wages and salaries rose by only 8.7%, while prices increased 9.5%. In 2014 the median worker’s inflation-adjusted earnings, by one measure, were no higher than they were in 2000.
Yet in 2015, the article notes, the median household income, adjusted for inflation, rose by 5.2% followed in 2016 by another 3.2%. Rather than abating, this year to the third quarter wage growth for factory workers, builders and drivers outstripped that for professionals and managers, with some blue-collar workers seeing rises of 11% in the buildings trade.
Unfortunately, this is not being paid for by rising productivity.
In the manufacturing sector, for example, the article notes output per hour worked is just 0.1% higher than a year ago and remarkably has not grown at all in the past five years. To the extent rising wage costs are being met, it appears to be due to a cheapening dollar. On a trade weighted basis, the article says the dollar has fallen by almost 9% since the start of the year. A weakening dollar and growing world economy have increased demand for American goods, with exports up in the first three quarters of the year by nearly 4% over 2016.
More encouragingly, a rising oil price has spurred investment in the tight oil and gas markets.
Data from Baker Hughes show that the active oil rig count in America has risen from 568 a year ago to 907 today. Indeed, so significant as the oil and gas industry been that the article reports UBS data saying that energy investment has driven nearly three-fifths of all economic growth in 2017. As a result, however, wage growth has not been equal in all regions. Southern oil states such as Texas and Oklahoma account for almost all the acceleration in manufacturing employment this year, whereas those areas that have been in long-term manufacturing decline have seen almost no growth at all.
So far, inflation has remained subdued despite the proportion of male prime age workers remaining close to a record low of 89%, with nearly all growth coming from increases of women in the workforce. Hopefully, rising wages will encourage more male jobseekers in the 25-54 age range to return to the workplace — a development that will be needed if rising wages are not to spur greater inflation.
And inflation is showing the first signs of reawakening. Whether that is due to unemployment falling to a 17-year low or other effects is not clear, but the Federal Reserve Bank of New York’s underlying inflation gauge has jumped to 2.96%, a post-Lehman high.
Nevertheless, rising incomes for lower and middle earners will not only have the beneficial effect of reducing inequality. By spreading wealth amongst the wider population, it will be a greater spur to GDP than if it were concentrated in the hands of a wealthy few.