Is labor starting to get its turn? In the after-math of the financial crisis, the slack created in the US employment market left wages stagnating. Even as headline unemployment fell, the negotiating power remained with the companies as underemployed individuals were welcomed back into the main workforce. The result is that companies reached new highs in profit margins as the restriction of labor cost combined with other productivity measures (and falling interest rates on refinanced debt). As the maturity of the US economic recovery tightens labor conditions, there is starting to be a wage response. Pressure not only comes from the workers themselves, but from politicians. President Obama has called for a higher minimum wage which this week the large employer Walmart responded to in its fourth quarter earnings report. About 500,000 Walmart employees will see their hourly wage jump to $9 – about $1.75 higher than the federal minimum wage of $7.25.
News headlines around the world over the past week show you that this is not a purely US phenomenon The Bank of England noted the 2.1% increase in average weekly earnings including bonuses in December. In Japan, automaker labor unions are seeking a 2% pay raise for their members. Heck, even the Greek debt saga basically revolves around the societal impact austerity has inflicted on its people. With this budding resurgence of labor comes benefits and risks. In the consumer-driven US, rising wages support ongoing economic growth (helping the top-line of consumer-related companies) while at the same time starting to apply downward pressure to profit margins (and thus earnings growth). In Japan, they need sustainable wage growth as the self-reinforcing power to foster stable inflation which in turn creates some sovereign concern for government with over 200% debt/GDP outstanding looking at potentially higher nominal interest rates. In Europe, wage growth could become a spark to restart economic activity but the divergence of fortunes creates political risk. All is to say, each change in economic condition creates cause and effect. On the whole, rising wages globally is a net positive but we must be mindful of who ends up paying the bill.
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