November 27, 2005

WAGES DON'T RISE TO MEET FALLING PRICES:

As Profits Surge, Workers Still Wait (Tom Petruno, November 27, 2005, LA Times)

This is Wall Street's version of comfort food: Corporate earnings keep rising at a double-digit pace while workers are lucky to get even low-single-digit wage increases.

For the last few years, those trends have been dependable and soothing for many stock market bulls — if not for the average worker. It's a world in which share prices are underpinned by healthy earnings while inflation risks are muted because employee pay isn't in danger of an upward spiral.


And because of that deflation and stock and home ownership the workers keep getting wealthier without wage increases.

Posted by Orrin Judd at November 27, 2005 9:16 AM
Comments

Workers do get wage increase. They just change jobs rather than advancing within the company.

Posted by: Brandon at November 27, 2005 10:18 AM

You've also got to look at the cost of benefits and at the extent to which worker wealth is tied to the stock market, although it is beneficent of the airline workers unions to provide an object lesson on the effects of demanding outsized wage increases.

Posted by: David Cohen at November 27, 2005 10:37 AM

Do you expect home prices to continue their appreciation in a deflationary environment? Either wages have to rise to make the higher mortgage payments, or home values have to fall to make the payments more affordable. The last 4 years were a fluke of abnormally low interest rates, it isn't sustainable.

Posted by: Robert Duquette at November 27, 2005 10:45 AM

Robert:

Sure, that might hurt a 50 year-old who has too much of his net worth tied up in a monster home, but it will help a young married couple trying to get house #1.

Do the line employees at the Japanese factories in the US have 401(k)s? If so, they are already light years ahead of the union members left at the Big Three. Because if the auto companies think they are going to fob off their pension commitments onto the US taxpayer, I think they are in for a big surprise. The GOP can do without two Senate seats in MI, and I doubt if the Democrats make it a plank in 2008, unless they want to continue to drive away voters.

Posted by: jim hamlen at November 27, 2005 12:16 PM

First, adjust wages as per Brandon's observation. This captures the "liquidity" value of being a wage earner rather than a "hard assets" investor. Moreover, subtract from corporate profits to account for having to fund capital expenditures including depreciation (and many other adjustments I can't think of now) to arrive at a more apt comparison: Free Cash Flow. The gap vs wages is probably much smaller. Then analyze the volatility of wages vs that of free cash flows. A stake in receiving free cash flows is riskier than that of receiving wages. Therefore, its rewards in good times must be larger.

Posted by: MGNC at November 27, 2005 12:49 PM

Robert:

Yes, we have too few houses.

Posted by: oj at November 27, 2005 2:16 PM

You can't sell them for prices that people can't afford. Unless you go to multi-generational mortgages like in Japan.

Posted by: Robert Duquette at November 27, 2005 4:05 PM

No one can afford a house, that's why we have mortgages.

Posted by: oj at November 27, 2005 4:09 PM
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