Chapter 10
Wages Are Different Now
The fact that wages and employment are linked should not be shocking news. Wages are the market price for employees. There are many factors that prevent the supply demand relationship between labor and wages to function like a typical free market. Employers want to avoid employee turnover costs and there are usually regulations about wages and terminations. Employees may consider benefits of employment other than just wages, that may not be captured in pay data and also often want a level of predictability in their incomes. Many of these factors tend to make the price of labor less volatile than some other economic figures.
Much of the wage data that is used in economic analysis comes from the same surveys used for employment figures described earlier. The wage data primarily uses information coming from the establishment surveys. In the European Union (EU) similar data appears in the quarterly and annual EU Labor Force Survey, based on household samples. There are similar reports for other countries and regions as well. There are also measures, such as personal income, that include broader definitions of wages and there is data that is less dependent on surveys that often is derived from tax records. Although tax data tends to be made available on an annual basis rather than monthly, therefore usually has a longer lag.
Much of the data used in the widely followed reports is based on pure hourly wages; it is clearly more focused on traditional businesses and manufacturing style companies. Much of the data released on wages does not factor in bonuses or deferred pay or those that take equity in a company in lieu of wages. The apparent increased use of these various payment methods has weakened the value of utilizing traditional wage data, especially in countries with a high proportion of younger people in the workforce. Personal income, which is a broader definition of earnings, is a better measure than many of the hourly earnings and wage data, especially as compensation methods shift. While personal income reports are typically available monthly and do not come out as frequently as some other wage data, reports include nonwage compensation, personal income on rental properties, government transfers, and other breakdowns. When looking at wage and income data across various countries averages can be misleading; dispersion of income can vary greatly and be a sign of income class stratification, which can increase a countries potential instability.
Wages and income data do not always capture the whole cost of labor, or the whole benefit to the laborer. There is usually training costs and facility costs for the employer. For the employee, they may get the benefits of training, or the employee may have paid for themselves to get a considerable amount of training from which the employer benefits. In the United States it is typical for the employer to offer health care, but there may be other family benefits or perks like child care, savings plans, or Friday keg parties. More critical than keg parties, there are increasing differences in the way people are paid. There appears to be greater use of bonuses, profit sharing, or payment in equity in younger entrepreneurial companies. All these shifts in pay can distort the data that is being used to measure wages.
Traditional theories involve a high linkage between employment, wages, and inflation. One of the impacts of structural and technological innovation appears to be that this linkage is breaking down, or at the very least the reaction time between employment increases, wage hikes, and inflation is slowing down meaningfully.
How the interaction of specific factors in the employment, wages and inflation connection transmits through an economy is one of the more exciting concepts in economics. Below is a simple outline of a classic economic cycle influenced by employment and wages in the economy:
a)Employment increases as capital is readily available and companies expand.
b)The supply of available workers shrinks.
c)Companies raise pay to win workers from competitors or get workers to reenter the workforce.
d)Companies need to raise prices to pay for higher wages.
e)With more people employed, there is more demand for product.
f)Higher prices and more demand increases inflation.
g)Central banks raise interest rates to hold down inflation.
h)Higher interest rates slow down the economy, easing the demand for workers.
If you let technology disrupt this cycle you can play a game of “what if.” In step c), what if companies decide wages are already too high and it is cheaper for them to invest in new technology that can substitute for workers than hire anymore? Will that shift the timing and limit the level of inflation? Will the threat of such substitution cause workers to avoid asking for raises? Now ignore the change to step c) and look at potential technology changes to step d) in the cycle. What if technology and the internet of things has increased pricing information for consumers and made global products available for the consumer to purchase? Companies will have much less pricing power in this environment. Every time a company looks to increase prices potential, customers look on the internet or scan the bar code with an app that tells them where they can get the item cheaper. This lack of pricing power may squeeze corporate profits. A final example could be “what if” in step d). Instead of substituting technology, the companies shift employment to lower wage regions using improved communication and logistics technology to either outsource work or relocate a facility to locations where labor is cheaper. It is constantly surprising to hear policy makers and investors talk in the media about technology displacing workers, but still think the employment, wage, inflation cycle works the same as it always, supposedly, did.
Trendy Until it Ages
It appears that in every age younger people do things differently, from rock ‘n’ roll to punk rock to rap to hip-hop to dubstep. Many changes that are currently being highlighted as new economic trends are most prevalent among younger people. Current examples might include working multiple part-time jobs instead of one full-time job, working independently using technology such as Uber, or telecommuting. Similarly, some of the shifts in compensation are primarily associated with younger workers too—most notably greater focus on lifestyle over a wage and a greater willingness to take an equity stake to participate in the potential upside of a firm and have a lower wage.
These factors cause distortions in the traditional labor and wage data, especially as millennials are such a large part of the population in many countries. However, it may take years to see if all of these current trends will actually change long-term economic patterns or not. Some of these trends may not hold as the current younger portion of the workforce ages. For example, living with six roommates may be fun at 21, but be less appealing at 35. Working independently or multiple part-time jobs may remain a popular lifestyle as people age or it may not. As people get married and have children their focus may turn toward current income versus equity in a start-up or they may find it harder to telecommute when the home they are working from is full of three kids under the age of eight that need to get ready for school. Some of these trends may subsist as a younger generation ages, but others will subside. Investors can make a mistake if they expect a youthful fad to be a long-term trend and they are wrong, if a fad can have appeal to multiple generations it may have a longer lifespan and impact long term economic trends.
Like other employment data, wage trends are an important factor in consumer confidence and can influence savings rates, which impacts capital formation. Rising or falling wages can have a major impact on the decision for people to enter or leave the work force shifting the participation rate and the potential growth of an economy, which then impacts tax revenues used to support governments. Even with flawed data, it can be valuable to explore wage trends within industries and across countries. Wages, even more so than some other statistics, can not be looked at it in a vacuum. Training, education, health, and other factors all impact an economy’s employment and wage levels. Wage data can vary greatly by the type of worker and job that is being created and by the amount of technology investment being put into a business. There is a large difference if wage declines are occurring because the economy is firing software coders and hiring stock room employees or if wages are just being cut across the board for everyone. Technology is changing the value of labor and wages.