Signs point to better raises this year

By Dow Jones Newswires-Wall Street Journal
Posted Feb. 11 at 5:51 a.m.

U.S. workers have reason to hope for slightly better pay raises this year, a shift that could add momentum to the economic recovery.

This could mean average wage gains of as much as 3 percent in 2011, compared with 1.7 percent in 2010–enough to boost consumer spending, which accounts for more than two-thirds of the economy, but not so much that it would stoke concerns of an inflationary spiral.

“There are some green shoots in terms of wages,” said Torsten Slok, senior economist at Deutsche Bank in New York. “Companies are starting to respond in a more traditional way and reward their workers.”

Thus far in the recovery, companies have focused more on controlling costs than on sharing the fruits of rising profits and productivity with their staff. In the past two years, productivity–measured as output per hour–has risen at an average annual rate of about 4 percent, and corporate profits more than 30 percent. But the average wage increased at a rate of less than 2 percent.

Now, though, the austerity appears to be easing a bit. In a recent survey by Duke University’s Fuqua School of Business, chief financial officers forecast an average 2.5 percent pay increase in 2011, up from the 1.9 percent they forecast for 2010 a year earlier. A separate survey by the Society for Human Resource Management suggested the average increase could be closer to 3 percent.

In January, the average U.S. hourly wage logged its largest one-month jump in more than two years, at 0.4 percent–though the move was at least partially the result of bad weather that took a lot of lower-paid workers out of the month’s sample.

It isn’t clear how widespread any pay increases might be. Many areas, particularly downtrodden sectors such as construction, will need to see a lot of hiring before any significant pressure on wages develops. But in other areas, such as manufacturing, which has added 150,000 jobs over the past year, some executives say competition to attract and retain skilled workers is intensifying.

“In this environment, the need to keep people is costing us more,” said Andy Ellard, general manager and co-owner of Manda Machine, a Dallas-based company that makes specialized parts for the aerospace and transportation industries. He said Manda just implemented a round of raises in the range of 2 percent to 4 percent, the company’s first in two years.

The wage growth could take a bite out of company profits at a time when rising commodity costs are already eroding margins. “We’re getting cost pressure from everything from employees to raw materials to insurance,” said Ellard, noting that the prices of the metals his company uses have risen 10 percent to 15 percent in the past year.

Still, most economists don’t see the beginnings of the kind of wage and price spiral that could lead to problematic inflation. Rather, they tend to perceive any wage increases as a benefit for the Federal Reserve, which has been trying to get inflation up a bit from the current low levels.

“We do see some bottom forming on wages,” said Joseph Carson, director of global economic research at AllianceBernstein in New York. “But you’re going to have to see a lot more job growth before you see wage growth pick up in a meaningful way.”

This year should be better for job growth than last. On average, economists polled in the most recent Wall Street Journal Economic Forecasting Survey expect the economy to add about 180,000 jobs a month in 2011, shaving several tenths of a percentage point off the unemployment rate, which currently stands at 9 percent.

In one positive sign, new claims for unemployment benefits in the week ended Feb. 4 fell to their lowest level since July 2008.

Average wages, though, can rise without much hiring. Brian Bethune, U.S. economist at consultancy IHS Global Insight, notes that growth in the manufacturing sector could boost the average wage by creating jobs that pay better than many of the service-sector jobs that have been lost. That’s good for the people who get the jobs. But because manufacturers are also more productive–that is, they need fewer workers to generate the same amount of output–it could lead to a situation in which unemployment doesn’t fall much, even as both wages and the economy grow.

“It’s good for the economy, and it’s good for growth,” said Bethune. “But it’s going to exacerbate the inequality between those who are employed and those who are unemployed.”

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