Greenspan predicts wage rise on the way

Even a small increase in pay would mean a big boost for the economy.
CHRISTIAN SCIENCE MONITOR
NEW YORK -- Last year, Alan Greenspan received a very modest 1.5 percent pay raise, moving his salary up to $174,500 per year. The year before was only a little better: an increase of 3.1 percent.
Even if most Americans don't make that much money, those small salary increases will resonate with most wage earners. But according to Greenspan, better days are ahead. He recently told a congressional committee that he could foresee a time during this economic cycle when business would expand, adding new jobs. The labor market would tighten, and voil & agrave;: Companies would pay more for their carpenters, pipe fitters and draftsmen.
"The way that happens is that they start to hire and bid up wages in the process, and that's the process by which compensation of employees rises relative to the national income and eventually starts a new cycle," the Federal Reserve chairman said.
Impact on economy
If Greenspan is correct, it would be a big, and potentially important, change in the economy. Every 1 percent rise in salaries adds about $53 billion to the economy. That's equal to one-third of this year's tax cut, some of which will then expire. A 1 percent rise in salaries may be enough to power consumer spending, which represents about two-thirds of the economy. And it might keep the economy from faltering next year.
"We will need rising incomes to sustain economic growth in the absence of a tax cut and low interest rates," said Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis.
If employers do become more generous, it would mark a change. Last year, wages rose 2.9 percent; the year before, 2.7 percent. By contrast, during the boom years of the 1990s, they rose as much as 5 percent.
At the end of this week, investors will get a chance to see if there has been much change when the government releases the first-quarter employment cost index, which measures how much wages are rising. Economists are expecting another modest gain.
The ECI "has been as high as 1.3 percent and is averaging about 1 percent per quarter," said Roger Kubarych, an economist with HVB Group, Germany's second-largest bank. "If it goes much beyond that, it would be a red flag to the Fed" because of inflation concerns.
A longer wait?
Kubarych, who closely watches labor trends, agrees with Greenspan's conjecture that wages will start to rise. But he expects the timing to take longer. "I think there's another year when wages and salaries will show only a slight increase," he predicted.
One reason compensation is remaining modest is that wage increases are not high on workers' negotiating lists. Instead, the major issue is health benefits, because employers are trying to rein in or transfer rising costs to workers. Last year, health-care costs grew by 6.5 percent and in 2002 increased by 4.7 percent.
"In virtually every negotiation, unions are under serious pressure to make concessions on health care," said Paul Clark, a professor of labor studies and industrial relations at Pennsylvania State University.
That's one of the major issues between the Communications Workers of America, representing 100,000 workers, and SBC, the Denver-based telecom company. It was also a major bargaining point between food workers and Giant Foods and Safeway. They agreed to a modest wage increase of $1.25 an hour over four years and an increase in their health-care deductible and copay on prescription drugs.
"There is an insistence by the unions who feel it [health care] is a bedrock benefit they must hang on to," said Richard Bank, director of the Center for Collective Bargaining at the AFL-CIO in Washington.
A hirer's market
Another reason wages have not risen much is the large overhang of workers waiting to get back into the market. According to the Bureau of Labor Statistics, about 8.3 million workers are looking for a job. That has allowed companies like Phoenix-based SurfNet Media Group, which has 60 employees, to keep costs down.
"We are able to hire at very favorable wage rates," said Robert Arkin, the CEO. "Wages have remained level, but in a few cases, they have gone down."
Other businesses, however, are starting to see a change. In Washington, Bill Angrick of Liquidity Services Inc., an online auctioneer of surplus industrial equipment, has had to increase wages from 3 percent to 10 percent. And to keep and attract new people, the company is absorbing an 18 percent increase in health-care costs.
"We are in a very competitive market," CEO Angrick said, "and as a business that is intent on retaining and hiring the best people for the job, we have stepped up."
Phoenix-based Duffy Group Inc., an executive-search and business-consulting company, is also seeing signs of rising compensation. As client companies have exit interviews with departing workers, the interviewers are finding that compensation is one reason employees are leaving. They then turn to Duffy to find out what they should be paying.
"A lot of companies are now doing surveys with us to make sure what they are paying is at or above the market," said Scott Smith, senior vice president.
Greenspan figures that companies can now afford to pay more because their profits have soared. And as long as they don't pass the costs on, he's not concerned about any inflationary effects. But he added, "Should such an acceleration of costs persist, however, higher price inflation would inevitably follow."