America Inc. Wakes Up to Wage Inflation
Even as the U.S. job market has improved, companies have been slow to pay workers more. But they may now be approaching the time when they have to cut bigger paychecks to compete. What's more, they appear to be getting ready for this.</br></br>The unemployment rate has been falling swiftly, dropping to 6.3% in May from 7.5% a year earlier. But there's an open question about how much slack there is in the job market. Some 37.2% of the working-age population is out of the labor force now, compared with 34% when the recession started in 2007. And while some of those people lost to the labor pool will likely return, some, such as those nearing retirement age and those whose skills have eroded, may never come back.</br></br>At Wednesday's news conference following the Federal Reserve's two-day policy meeting this week, Chairwoman Janet Yellen indicated that for her, an important sign the labor market is tightening will be when wages are increasing more rapidly. So far, that hasn't been happening. Average hourly earnings were up just 2.1% in May versus a year earlier, and the Labor Department on Tuesday reported that, when adjusted for inflation, they were actually a shade lower.</br></br>But companies think they will soon be paying more. This month, a quarterly survey conducted by Duke University and CFO Magazine showed that U.S. chief financial officers expect wages and salaries at their companies to increase 3% over the next 12 months. Last June, they had expected year-ahead gains of 2.5%. Further, they now expect their workforces to increase 1.9% versus 0.8% a year ago.</br></br>That leaves the little matter of how companies will pay for those bigger, more expensive workforces.