8-17-05,9:50am
The most recent round of economic reports points to higher growth in all parts of the economy except one: wages. Wage increases are weak and are forecast to remain low in 2006.
Real Gross Domestic Product (GDP) growth for the second quarter came in at 3.4 percent, below the first quarter’s 3.8 percent, but slightly higher than many economists had forecast. For the year ending in June, GDP increased 3.6 percent.
Residential housing investment grew 11.0 percent, fixed business investment jumped by 9.0 percent and exports rose by a strong 12.6 percent. What is missing once again is any sign of real wage increases.
The latest employment cost index (ECI) data confirm that wages remain flat across all sectors. Total compensation costs — wages plus benefits — rose 0.7 percent from March to June for civilian workers, the same increase that occurred in the first quarter.
Wages and salaries rose 0.6 percent in the second quarter, the same rate as the first quarter. Benefit costs increases slowed from 1.2 percent in the first quarter to 0.8 percent in the second quarter as employers continued to cut benefits and shift costs onto workers and insurers curbed their premium increases to secure market share.
For the year ending in June, wage costs for private industry workers excluding sales employees rose just 2.5 percent, equal to the inflation rate for the same period, meaning that wages for private sector workers are essentially frozen. Real weekly earnings reported by the Bureau of Labor Statistics show a zero real wage increase in the first half of 2005. This follows on the heels of an actual real wage decline for 2004.
Mercer HR Consulting’s survey of 1,350 employers with 13 million workers reports that employers plan to increase wages and salaries by an overall average of 3.6 percent in 2006. For hourly workers, however, the increase will be only 3.5 percent, slightly above the 3.4 percent increase for this year.
In the late 1990s, wage and salary increases reported by Mercer typically ran two percentage points above inflation, reflecting an increase in real wages. The 2005 and 2006 results, however, indicate that real wages are flat, barely topping the projected inflation rates for 2005 and 2006. Forecasts for 2006 call for inflation of between 3.0 percent and 3.5 percent.
The wage and salary survey data do not capture the increase in benefit costs that employers are pushing onto workers and deducting from their paychecks. The 2005 Watson Wyatt/Washington Business Group on Health survey of 555 companies employing 10 million workers shows that 25 percent significantly increased the employees’ portion of premium costs in 2004 and 32 percent increased the employees’ share in 2005.
The survey also shows that 24 percent of employers significantly increased point-of-service cost sharing in 2004 and 34 percent did so in 2005. Last year, 27 percent of employers reduced or eliminated coverage for certain services; 29 percent did so in 2005.
In addition, 28 percent of employers increased employees’ deductibles this year, and another 17 percent plan to do so in 2006. Higher premiums, deductibles and co-payments and reduced coverage all represent cash diverted from workers’ wages to cover health care costs that were previously paid for by the employer.
The ongoing trend toward economic expansion with no wage growth is fraught with negative implications. Because wages have been stagnant or have declined in real terms for most workers, consumer spending has been fueled by borrowed money for the past three years.
Consumer spending outran income growth by an annual rate of nearly two percentage points in the second quarter. Consumers can maintain this higher rate of spending only by increasing their credit card debt and taking out equity loans against their homes.
Consumer credit jumped by an annual rate of 8.2 percent in June, the largest increase in more than a year.
As the consumer debt load grows, savings decline. Personal saving fell to 0.2 percent in the second quarter of 2005, the lowest quarterly saving rate on record, according to the Commerce Department.
Low interest rates have spurred this risk-laden approach to spending, but the Federal Reserve is committed to raising rates through the end of the year. Workers are facing higher interest rates on the large debt loads they carry and smaller paychecks to cover payments.
From Labor Research Association
