27 July 2017

Wage Pressure Begins to Build

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The improving U.S. jobs market has been marred by stubbornly slow growth in wages, but recent results from companies show the outlook for some workers may be brightening.

A wide range of companies have reported upward pressure on wages in the early months of the year, including asset-manager State Street Corp., coatings manufacturer PPG Industries Inc. and eatery operators Chipotle Mexican Grill Inc. and Darden Restaurants Inc.

Martin Ellen, chief financial officer at drinks maker Dr Pepper Snapple Group Inc., projected a $30 million rise in "people-related costs" for the current year, "reflecting both general inflation in our field labor costs" and higher health and benefit expenses. Mr. Ellen told investors he expected to see compensation costs rise more significantly in the third and fourth quarters of the year, with wage inflation pushing employee costs up about 2% and accounting for about two-thirds of the year's total increase.

The comments are at odds with broader economic data—U.S. Labor Department figures on Friday showed private-sector nonfarm hourly wages grew just 1.9% in April from a year earlier—and economists aren't finding much evidence of a strong uptick in wages five years after the recession ended.

Still, executives at more than two dozen large companies—including manufacturers as well as financial and services companies—reported rising wages in significant portions of their businesses, much of it in the U.S., as they discussed first-quarter results.

Typically, wage growth is a negative for companies, which have successfully kept a lid on compensation for years, allowing them to boost margins and improve profits even amid slow sales growth. The cumulative effect has been stark. Employee compensation as a share of national income has fallen to its lowest point since 1951, at 66%, while profits rose to a level not seen since around the same time, at about 16%, said Christopher Probyn, chief economist at State Street Global Advisors, a unit of State Street Corp.

That may have been good for companies, but it has weighed on the broader economy. When workers are paid more, they can buy more, and businesses can sell more products and services.

Click here for the full article in the Wall Street Journal.

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