With unemployment now less than 5 percent, employers are finding themselves with fewer hiring options . . . Rising salaries are one reason for the increased participation rate, as the prospect of better pay draws more people into the labor force. As much as employers want to hold the line, competition for workers is intense, with market forces helping to drive wages higher.
That was written when unemployment was 4.8 percent; today, it is 4.1 percent. You have to go back to the tail-end of the dot-com era to find a lower rate (the lowest was 3.8 percent in April 2000), although the rate was lower during some parts of booms in the 1950s and '60s. This leaves employers who need to hire with two options. One is to entice employees from the competition with promises of better working conditions, wages, stock options, benefits, perks and so on. The alternative is to find ways -- again with higher pay and the like -- to bring those who have left the labor force back into the fold. This latter option may be the more intriguing: The labor force participation rate of 62.7 percent of working age Americans is at lows not seen since the late 1970s, but for the past couple of years has shown signs of bottoming.
Either option requires employers to spend more, and in some fields, considerably more, on employee compensation.
Thus, what we are starting to see in the broader economy is the culmination of several trends that date back to 2010 or so. Hourly average wages were up last month at an annualized rate of 2.5 percent. Don’t be surprised if that rises faster as the economic recovery from the financial crisis continues apace.
The biggest impact of wage gains will play out for investors in several ways:
• First, expect to see costs rise for companies. With profits at record highs and labor costs fairly modest, some mean reversion is inevitable. How that will affect profits has yet to be determined.
• Second, count on increases in retail spending, durable purchases and even homebuying. The early data from the holiday shopping season shows Americans are in a spending mood.
• Third, and perhaps most important, is the impact on inflation. There are some early signs that wage inflation is rising, and could push through to overall prices. This could have implications for how quickly the Federal Reserve raises interest rates.
The decline in unemployment and rise in minimum wages are the culmination of years of earlier patterns; watch for how they unfold in 2018.
This column was provided by Bloomberg News.