Home' Trinidad and Tobago Guardian : April 16th 2015 Contents BG20 THE ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt APRIL 2015• WEEK THREE
The people of Royersford,
Pennsylvania, are feeling
In the Main Street Cafe, in the town centre,
a man complains that his pension payments
soon will be frozen. Sheena, a waitress, says
that business is brisk, but rues the "teeny tiny"
pay raises she and her friends have received.
The worries of Royersford are familiar across
America. Although it has chugged along far
better than other rich countries, the world s
largest economy still fails to instill confidence
in its workers. Add to this sour economic data
from the beginning of 2015, and some question
the strength of the American recovery. Wages
hold the answer.
Gross domestic product, or GDP, is made up
of four things: government expenditure, net
exports, investment and consumer spending.
One component, government largesse, is doing
better. After years of weighing on growth, higher
spending is helping the economy.
The other components tell another story.
Start with exports. On a trade-weighted basis,
the dollar has appreciated by 13 per cent in the
past year. America is not especially exposed to
the vagaries of international trade; exports of
goods and services equal only 14 per cent of
GDP, compared with 26 per cent for the euro
zone. However, the dollar s recent rise, which
makes American products less competitive on
world markets, has been so dramatic that prob-
lems are emerging.
Paul Ashworth of Capital Economics, a con-
sultancy, is expecting a 14 per cent annualised,
inflation-adjusted decline in exports during the
first quarter of this year. With the euro zone
expected to grow by only 1.4 per cent this year,
and the Canadian economy also slowing,
demand for American wares from important
trading partners threatens to be lackluster.
Businesses already are feeling the pain. A
third of the sales of companies in the S&P 500
index come from abroad. Corporate profits fell
by 1.6 per cent in the fourth quarter of 2014
and were 6.4 per cent lower than in the same
quarter of 2013.
As profits have been squeezed, so investment,
the third component of GDP, has stalled. Figures
released at the end of March show that orders
for "durable" goods---things that last a long
time, such as industrial machinery---dropped
by 1.4 per cent in the previous month. "Core"
orders of durable goods, which exclude trans-
portation equipment, have fallen every month
since October and, with the oil-price slump,
spending on energy projects has crashed. Declin-
ing investment in mining will wipe 0.8 per-
centage points from GDP growth in the first
quarter, researchers at Capital Economics say.
Steven Ricchiuto of Mizuho Securities, an
investment bank, expects corporate investment
"Companies are not in a mood to add to cap-
ital stock," he said.
All this sounds bad. However, the American
economy lives or dies by what happens to con-
sumer spending, which makes up the lion s
share of G.D.P. If buoyant, it could prevent the
economic blip from turning into something
Economists had expected strong consumption
growth in 2015. Americans have seen a windfall
from a halving of the price of oil, and outstanding
consumer credit has grown for 42 straight
Despite that, consumption growth has slipped.
Unusually bad weather earlier this year partly
explains what is going on. A freezing winter
forced Americans to stay indoors instead of
going to the stores. The biggest thing working
against stronger and more sustainable con-
sumption growth, however, is pay.
In Royersford s part of Pennsylvania, real
hourly earnings fell by one per cent last year.
Down the road from the cafe, and past a few
vacant lots, the owner of Sweet Ashley s Choco-
late said that she would like to hire, but can
afford to pay only the minimum wage. One of
her friends has three jobs, one of them full-
time, to make ends meet.
Across America median inflation-adjusted
wages are no higher today than they were when
the financial crisis hit.
Economists struggle to explain why wages
have not taken off. The most recent jobs report,
for March, was muted, but that served to high-
light how robust the data have been for the past
two years. The unemployment rate stands at
5.5 per cent, below its historical average.
Economists expect that wages should rise
faster in such circumstances, since employers
have to compete for workers. A research paper
from the Federal Reserve Bank of Chicago esti-
mates that, if real wage growth had followed
its historical relationship with the unemployment
rate, by mid-2014 it would have been 3.6 per-
centage points higher than it actually was.
Three big things, though, have held back pay:
changes to America s unemployment-insurance
system, the behaviour of companies, and the
persistence of labor-market "slack."
America s unemployment-insurance system
underwent a big change at the end of 2013.
Before then the average American could get 53
weeks worth of unemployment benefits, and
in three states they could get 73 weeks worth.
Congress then decided to make benefits stingier:
The average limit dived to 25 weeks, cutting off
1.3 million Americans immediately.
With nothing to fall back on, the wage expec-
tations of many unemployed people fell, said
Iourii Manovskii of the University of Pennsylvania
in Philadelphia. Employers in some sectors
quickly took advantage of this newly cheap pool
of workers. A big chunk of the three million
extra jobs created during 2014 were in poorly
Even firms in typically well-paying sectors
are being tightfisted with their workers. A recent
paper by Mary Daly and Bart Hobijn, both of
the Federal Reserve Bank of San Francisco, looks
at the problem of "nominal-wage rigidity." The
paper argues that, when the financial crisis hit,
employers found it difficult to reduce the cash
value of the wages paid to their staff: Foisting
a pay cut on your entire work force hardly boosts
Inflation was too low to take a big bite out
of real wages by keeping nominal wages flat.
Instead employers fired their least productive
workers, keeping the best ones happy. That
helps to explain why, counterintuitively, median
wages did well even as unemployment shot up.
Now, to compensate for the high wages paid to
those staffers that got through the recession,
companies are willing to offer new recruits only
low wages. The survivors do not see raises either.
Companies may be able to get away with
offering measly pay since the labor market still
has plenty of "slack"--- ie, there are workers on
hand to fill additional jobs, should they be need-
ed. The number of part-time workers who
would rather be full-timers, so-called "part-
time for economic reasons" (PTER), fell much
more slowly than the official unemployment
rate following the recession.
The same goes for "discouraged" workers,
those who want a job but say that there is no
point in looking. Though few in number, their
involvement, or not, in the labour market can
sway wages. Both measures have fallen since
the recession ended, but are still much higher
than before the crisis.
According to a Chicago Fed paper, the PTER
rate is a particularly important determinant of
wage levels. It finds that a one per cent increase
in the PTER rate is associated with a 0.4 per
cent fall in real wage growth, even after con-
trolling for the effects of other measures of
unemployment. The impact is especially strong
for worse-off workers.
David Blanchflower of Dartmouth College
and Andrew Levin of the International Monetary
Fund found similar results in a paper published
When the PTER rate is high, workers may
feel unable to ask for higher wages, since what
they really want is more hours. Nervousness
about asking for more pay may ripple through
the labour market, said Daniel Aaronson of the
Economists also debate the effect of America s
"participation rate," defined as the number of
people in work or actively looking for jobs as
a proportion of the population older than 16.
Now at 62.7 per cent, it has been falling for
more than a decade. It is three per cent lower
than in mid-2009.
Some economists argue that a low partici-
pation rate is bad for wages. A pool of idle work-
ers, though not officially looking for jobs, stops
those with jobs from pushing for better pay,
since they are worried that their employers will
replace them. If wages do rise, those out of the
labor force can simply rejoin it, pushing them
However, this assumes that low labour-force
participation is due to economic conditions. A
paper by the Brookings Institution, a Washing-
ton-based think tank, disputes this. It posits
that the falling participation rate among work-
ing-age people mainly reflects structural factors,
such as technological changes that push some
workers out of the labor market permanently.
The Brookings research also tackles the ques-
tion of why the participation rate fell so sharply
around 2007-2008. The recession had an impact,
but demographic factors may have been more
About that time the first baby boomers turned
62, the minimal age to receive retirement benefits.
Using similar reasoning, the paper suggests that
the participation rate will fall further in coming
years. If its explanation is right, wages should
grow as the economy improves, since there will
be fewer workers willing to be sucked back into
the labor force.
If so, the latest data suggest, pay could be
about to take off. One survey found that 70 per
cent of American companies expected to increase
wages by at least three per cent in the year from
March. Pay raises are hitting the headlines:
McDonald s boosted the wages of its burger-
flippers on April 1.
Where big business leads, others will follow.
The CEO of Comfort Keepers, a social-care
provider a short drive from Royersford, notes
that employees at Wal-Mart are getting a pay
hike, a move that he may be forced to emulate.
David Doyle of Macquarie, a bank, said that the
change in average hourly earnings of private-
sector workers during the first quarter of this
year was the fastest since the recession.
If healthier wage data keep coming, interest-
rate hikes from the Federal Reserve soon will
follow. That would suggest that America s econ-
omy, despite the blip, is on its way back to nor-
Growth in America depends on wages
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