Wages are expected to rise with firms' bottom lines

Recovery? What recovery, wage earners may well be asking.

In four years of what economists describe as an economic expansion, corporate profits have risen nearly 60 percent.


But the latest U.S. Department of Labor survey found that wages and benefits rose only 2.9 percent in the last year -- less even than the annual 3.2 percent increase in the Consumer Price Index, frequently referred to as the cost of living.

Lower labor costs are making American businesses more competitive and profitable than ever.


But some, including Labor Secretary Robert E. Reich, fear that companies are shortsightedly growing profits at the expense of workers -- and that as workers/consumers pull back, the economy will drop into recession.

Are the latest statistics indications of the strength or weakness of the new American economy?

Ira Levin

Chief economist, J. C. Penney

The whole question of the numbers is important. . . . The Consumer Price Index probably reflects more inflation than there really is. Prices in our industry, apparel and home furnishings, have been declining probably for the last year now. And even a 2.9 percent increase in wages is high when prices are declining.

And the wage numbers don't reflect the total income out there. If you look at disposable personal income, it's up 5 to 6 percent because we have more employment year-over-year. And that is ultimately what's more important in generating sales.

But if the gap between wages and inflation continues over a long period of time, it would be difficult for retailers in terms of getting more real sales.

Recently, among consumers, there has been a big focus on getting value for your money. People are still willing to buy, but they are picky.


Audrey Freedman

Economist and president, Freedman & Associates, N.Y.

The latest statistics really show that wages and inflation are about even. We're talking tenths of a percentage point difference between the CPI and the Employment Cost Index. And there has been a bit of discussion recently over whether the CPI actually runs a little bit on high side.

But workers feel their standard of living is stagnating in a profound way. And that's been true since 1973. Gross domestic product per person hasn't been rising much, under 1 percent a year. If, over a long period of time, the standard of living doesn't rise, there is more struggle over shares, because it is a zero sum game.

But I don't think there is a great deal of public resentment over profits. I don't think we have a sense of class feeling about profits, not as much as we had in the 1920s or '30s. Everybody has some kind of share in a mutual fund or pension plan, and they know that in a way, their retirement is going to depend on stocks and bonds. We have a more comprehensive view of profits than we had in the '30s. Mutual funds have democratized profits.

Steve Hanke


Professor of applied economics, Johns Hopkins University

The U.S., fortunately, has extremely flexible labor markets compared to most countries. As a result, you see fairly intense competition in the labor market. And as a result, wages have gone up pretty much in line with productivity. That's why labor costs remain flat. You see a lot of new jobs being created because we are not pricing our labor out of the international market. We're working more hours and more people are employed. We have a very low unemployment rate compared to virtually every place in the world.

I think the fact that unit labor costs are relatively flat is a good thing. The flexible labor market is certainly a good thing. If we didn't have flexibility, we'd have unemployment rates like those in Europe -- in the double digits.

The high profits won't last. Right now we're in the final stages of a long recovery that started in 1991. We'll be pretty close to recession by the end of 1996 and corporate profits will start getting squeezed.

Ralph Monaco

Economist, Inforum Group University of Maryland


Yep, real compensation is down. And the ECI data make me even more nervous because of what is not picked up. The shift across industries isn't being accounted for. People have been moving out of the kinds of jobs with high benefits and wages to jobs with low wages and benefits, which means it is worse than the ECI suggests.

We've heard a lot about rising productivity, so when do workers get that increase? The answer is probably in a little while. When productivity picks up, the guy for whom you are working reaps the initial benefit. But as he realizes he can afford to pay you more, or would like to pay you more to keep you from working for someone else, he raises wages. The first thing you see is profits go up and then you begin to see competitive pressures push wages up.