March 1, 2018 glacierinvest

Wage growth is something that has been scrutinized and discussed ad nauseum to date. It has in some ways become the holy grail of economic indicators as it has been noticeably absent this cycle. Many have hypothesized why that may be. I’m not sure anyone knows for sure but I came across two very interesting charts this week. One made the case for why wage growth should start to move up meaningfully from here and the other made the case for why compensation isn’t going to be increasing as much as we might expect.

The first chart was presented in a Bloomberg View column by Barry Ritholtz. I recreated the chart in FRED as I thought it was a very interesting visualization. It looks at the number of unemployed people versus the number of job openings. Mr. Ritholtz pointed out that at the peak, there were 6.6 people out of work for every job opening, giving employers the pay leverage based on an abundant labor supply. As of the last data point, there were 1.1 unemployed people for every job opening, theoretically swinging the pay leverage pendulum in favor of the employee, given the lack of supply. I like this rationale and think it makes a lot of sense and will likely lead to some wage growth, but how much is another story.

The case against meaningful wage growth was made by Jonathan Tepper. He took a bigger picture view of employee compensation going all the way back to the 1940’s. In summary, corporate profits have been increasing at the expense of employee compensation. If this sounds like Thomas Piketty it certainly has the same underlying tone that basically companies have been getting richer at the expense of labor. I realize PIketty’s book Capital was a lightning rod in many ways but hear me out here. Mr. Tepper claims that power has been consolidating within all industries, creating monopoly, or at least oligopoly, conditions. As a result, companies have significantly more market power whether in product pricing or labor pricing. If there are fewer competitors then wages can be controlled and set by a single company or a group of colluding companies. It’s definitely thought provoking, especially in the context of how many fewer public companies exist in the US today versus 1996 (50% less) while other developed countries have seen an increase of about 50% over the same time period.

I’m not going to get into the politics of labor versus capital. However, the argument for why corporate profits remain high while employee compensation remains low makes a lot of sense. Something is going to have to give sooner or later in order for employee compensation to make a meaningful move higher. More competition would assuredly help and be beneficial to most of us common folk out there both from product pricing and compensation standpoints. For now however, I’m feeling a little pessimistic that companies and their CEOs aren’t about to share.