7-02-06, 10:06 am

U.S. employers have quietly been raking in extraordinarily high profits for the past two years while holding wages down and shifting more benefit costs onto workers. Real wages will decline further as economic growth slows in the United States and worldwide over the next year.

U.S. GDP rose 5.3 percent in the first quarter of 2006, but forecasters expect it to drop to 2.7 percent to 3.0 percent for the second quarter and to remain at that lower level for the rest of the year. The slowdown, which economists predict will continue into the first half of 2007, will affect both consumer and business spending.

Signs of the slowdown and the likely effects are outlined below.

Jobs. Job growth for the first five months of this year averaged only 108,829 jobs per month, well below the estimated 180,000 per month needed to absorb new entrants. Rising interest rates, higher inflation and stock market volatility could easily snuff out any significant job growth in the second half of 2006 and feed the downward trend in real wages. Long-term unemployment remains unusually high, with nearly 20 percent of the unemployed out of work for at least half a year.

Hours. Average weekly hours are declining, adding to the drop in weekly earnings. The decline in hours is another indication that job growth will remain slow.

Wages. The earliest projections for employers’ salary budgets for 2007 show a fourth consecutive year of increases below 4 percent. According to a new Conference Board survey, employers are planning salary and wage increases averaging 3.5 percent for 2007, the same as this year’s increase, which is falling well below the rate of inflation. Consequently, real wages will continue to decline through 2007.

Health Benefits. Employers have driven down increases in their annual spending on health benefits from 10 percent to 12 percent a year in 2004 to six percent to seven percent in 2006, primarily by pushing more costs onto employees and limiting coverage. This means that average healthcare spending borne by families has increased and will continue to increase as employers implement more “consumer directed” plans.

Inflation. From May 2005 to May 2006, the CPI rose 4.2 percent, erasing any wage gains at or below that rate. Although much of the increase in inflation can be traced to higher energy prices, the core rate, which excludes energy and food prices, rose at a 3.8 percent annualized rate from March 2006 to May 2006, indicating that higher energy prices are beginning to affect all sectors.

Lower Dollar. The U.S. dollar dropped more than 15 percent against the euro and the yen after the last recession, but regained some strength in 2005. Now the dollar is declining again against other major currencies. Global Insight predicts that the euro will be worth $1.50 by mid-2008, compared with $1.26 in June 2006. This should strengthen U.S. exports, which will appear to be more favorably priced at a lower dollar, but will hurt U.S. trading partners, who will eventually reduce their overall amount of trade.

Interest Rates. The Federal Reserve continues to ratchet up interest rates, with the federal funds rate moving from one percent in the middle of 2004 to five percent in June 2006. Further tightening in 2006 will cut into job growth as businesses pull back on spending.

Consumer Debt. Americans are deeper in debt than ever before in U.S. history. Families now need to use an average of 14 percent of their after-tax income to pay off debt. As the Federal Reserve continues to raise interest rates, consumers will fall further into financial difficulty.

Profits. Profits rose 23.8 percent in the first quarter of 2006 over the same quarter last year, but the rate of increase slowed in the first quarter of 2006 compared with the extraordinary rise at the close of 2005. Productivity remains strong, however, which means that companies will still glean higher than average profits even in the slowdown. Employers have shown no sign of passing along any portion of these gains in the form of higher wages.

Federal Spending. Almost one full percentage point of the strong growth in GDP during the first quarter stemmed from a 7.1 percent jump in federal spending, primarily higher military spending. For the first quarter of the year, military spending accounted for two-thirds of federal spending. The Bush administration’s military agenda means that there is no domestic funding available for programs to assist workers and the unemployed as the economic slowdown takes hold.



From Labor Research Association