Author Topic: Will wages rise with the economy?  (Read 530 times)

TheDrake

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Will wages rise with the economy?
« on: December 26, 2017, 02:10:54 PM »
The inertia behind wages is complex and varied, these are some of the reasons why I think median wages will rise slowly, if at all, as a result of increased cash flow or after-tax profit.

1. Larger companies have carefully calibrated wage schedules.

Every job description has an acceptable wage range associated with it. Hiring mangers have two choices to raise wages - push people up the range or re-classify them at a higher level. In highly skilled jobs, managers are given wide discretion. In less skilled jobs, there is little room for movement.

2. Small business owners are notoriously frugal.

When you look at the <50 employees small businesses (think restaurant, bar, mom&pop retail), these sole proprietors (or LLC) are pretty grim when it comes to sharing the wealth or thinking about top line expansion. Likely, they won't make more money by reinvesting into their one storefront, and they don't really have the mentality or enough extra cash to think about expansion. Even if they do expand, they will probably employ more people - not pay each individual more. If they run short of help, they are likely to absorb high turnover or run shorthanded than to share back another dime. Many small business owners are happy if they are maintaining a threshold that keeps them in their current lifestyle, and they are risk-averse as a general rule. We're talking about the people who don't want to pay a $2 credit card fee and won't let people have free soda refills.

3. Union contracts

Union contracts tend not to reflect general market trends with any great accuracy. Contracts up for negotiation are anchored at historic levels, and so companies know they might be saddling themselves with future headaches if they gave up ground, and I'm not sure the unions have had the power recently (if ever) to cite "higher profit" as a reason to get better pay for the workers they represent.

4. Margins are margins

The street pays very close attention to margin. Gross margin is often dominated by workers wages. Net margin is often dominated by SG&A or R&D expenses - which may or may not be dominated by compensation. On the face of it, it would make sense that lowered costs in the bottom line would make room for higher unit cost. But companies usually use Gross margin as a metric, and would be seen as losing margin even while increasing profit. They are more likely to re-invest in R&D or SG&A (more ads, new product development, more sales people, more executives) than they are in worker expansion (even assuming the workforce is domestic).

5. Productivity gain may be better realized through something other than wage growth.

You find yourself with a shortage of available labor. You can pay people more to fill the positions, or you can find a way for 3 people to do the work of 4. You might be much better off investing your new found capital in efficiency improvements. Maybe you put in a new pos or inventory system to reduce manual labor. Maybe you farm out cleaning to an outside contract company. Some companies certainly will pay a premium to get the best and most reliable workers, but there are a lot more Walmarts than Costcos.

Conclusion:

None of this stops higher-end wages from rising. Those making $60k and up might well see jumps in their compensation (wage, profit share, bonus, equity), and they might be high enough to see a rise in average wages. But those in the mid and lower quintiles are unlikely to move, in my opinion. So we'll see a lot of "rich get richer" type reactions as the gaps between growth at these different income levels accelerates.

Crunch

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Re: Will wages rise with the economy?
« Reply #1 on: January 11, 2018, 01:35:57 PM »
Those in the lower quintiles may be moving:


Quote
Wal-Mart Stores Inc. is boosting its starting hourly wage to $11 and delivering bonuses to employees, capitalizing on the U.S. tax overhaul to stay competitive in a tightening labor market.

Fenring

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Re: Will wages rise with the economy?
« Reply #2 on: January 11, 2018, 02:07:54 PM »
Business models are shifting whether or not most employers are aware of it. The previous system of establishing a solid niche and knowing your product is over. Now you never know if you'll be able to accomplish anything in the market. Technology has made it possible that some cheap warehouse in the boonies is the direct competition for a brick and mortar store in downtown, and that's not a tenable opponent to defeat. Your only asset is location, but as budgets are tight for most people the convenience eventually bows before cost. Now people will brag that they buy everything on Amazon.

Yes, small business owners are reticent to overspend, but that's partially because the economy sucks. It's literally because they can't afford to pay more, not because of some innate mentality. Product isn't moving, not nearly enough. The major stores will tell you that people aren't buying any more, and part of that is online commerce, but part is also that no one has cash to spend. You can argue that they're just buying different things, like computers and smart phones, which is true, but at the same time those aren't exactly luxuries that are equivalent to going for a fancy sushi dinner. Overall these are becoming more like utility expenses and are locked in as recurring costs that can't be transferred to other kinds of purchases. Likewise, rent in many cities continues to outstrip inflation and income levels. When product is moving slowly a small-medium business has its hands tied. It's probably struggling in the first place so getting a marginal tax break isn't going to change the overhead dramatically enough to throw higher wages around. For that business in general would have to be better.

I would suggest that it's more likely to see wage increases in boom cycles, rather than in recession cycles where a tax break is an attempt to stimulate the economy, which what we have now. Until business is operating soundly the main objective is going to be to keep in the black and keep costs down maximally. A small business owner isn't thinking in terms of a $1 an hour raise is going to help stimulate economic growth and will return in the form of more product moving, under the assumption that all other employers are going to do the same. They won't, and most can't. So to me that's not a realistic result to expect from a tax break like this. The more important effect that could generate sales would be for Joe on the ground to have an extra few hundred dollars in his own tax break, that ends up being spent on things.

Like Drake mentioned, a smaller-medium business has some chance of hiring new people, but IMO not really of raising wages just as sign of good faith. And frankly the competition is only getting harder, not easier. Almost any wage in America isn't 'competitive' in the global sense, and is absolutely not competitive with automation. Personally I foresee a downward trending cycle, and I don't particularly think the Federal fiscal policy is the key to turning things around.

Crunch

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Re: Will wages rise with the economy?
« Reply #3 on: January 12, 2018, 05:27:02 PM »
Quote
The U.S. Treasury and the IRS on Thursday put out new guidance and withholding tables for employers that incorporate changes from the new tax law.

Under those new tables, the Treasury estimates that 90% of people who get a paycheck are likely to see more in take-home pay, as soon as February. Employers will have until Feb. 15 to incorporate the changes in their payroll systems.

90% of people getting a paycheck taking home more money, that’s a pretty solid overall rise in wages.

Wayward Son

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Re: Will wages rise with the economy?
« Reply #4 on: January 12, 2018, 06:46:04 PM »
Yes, I'm sure the bottom 40 percent of wage earners will appreciate their solid $460 average increase in pay, just as the top 0.1 percent will enjoy their solid $128,000 increase.  ;)

Crunch

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Re: Will wages rise with the economy?
« Reply #5 on: January 13, 2018, 12:58:36 PM »
Envy is such an ugly emotion.  :)

Emotional appeals really don’t mean much either;)

TheDrake

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Re: Will wages rise with the economy?
« Reply #6 on: January 13, 2018, 02:26:36 PM »
Envy? More like calling out the statement that "everybody wins".

Crunch, you think that 90% of people getting a paycheck are paying federal income tax? I think Mitt Romney illustrated that isn't true. "Forty-seven percent of Americans pay no income tax. "

Washington post:

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60 percent of those who don't pay income tax are still working and paying taxes for Social Security and Medicare.


You can certainly defend the policy, but not with rosy cheeked hyperbole. Call it what it is. Stand up for what it is. Say that those people not paying any tax don't deserve anything - rather than pretend they are getting something they are not.

Crunch

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Re: Will wages rise with the economy?
« Reply #7 on: January 14, 2018, 02:17:23 PM »
90% of people that collect a paycheck will take home more money. Obviously, if you don’t collect a paycheck you won’t get to ke more of one.

As well, many people on the lower end get refunds without paying taxes:
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Take my talented friend Ellen who is a single mother with one qualifying child with a very modest adjusted income of $18,957. She paid no federal income tax in 2012, but did receive a “tax refund” of $3,500.

And

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So, for a typical two child family this taxable year “they can make up to $27,104 and not only owe nothing in taxes, but get a $4,220 earned income credit plus a $1,000 per child additional tax credit refund to them. This effectively gives them an artificial income of $33,324. This is better than a real income increase of that amount because the family’s income is still $27,104 when qualifying for public assistance and when figuring the taxable wages for Social Security and Medicare.” The maximum benefit is scheduled to rise this year “to $6,044, with a partial benefit available for taxpayers with incomes up to $46,227” and $51,567.

Note, that’s old data but still relevant.

Wayward Son

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Re: Will wages rise with the economy?
« Reply #8 on: January 14, 2018, 08:31:02 PM »
Envy is such an ugly emotion.  :)

Assuming it's from envy is an arrogant notion, and incorrect. :)

It's not that I don't think the top 1/10 of 1 percent don't deserve a tax break.  It's that the cost of that tax break is probably not worth it.

This tax cut is going to cost 1 to 1.5 trillion dollars over the next decade.  The National Debt is currently $18 trillion.  Do we really need another $1.5 trillion increase on top of the current deficit?  What are we getting for it?

For most working Americans, $460 a year.  ::)

And guess how much that increase in the deficit costs per American?  Do the math.  $464 a year, average.  :D

So the bottom 40 percent of wage earners basically break even.  Their "solid" increase in wages is exactly reflected in their share of the increase in the Debt.

And eventually we are either going to have to pay off that debt or cut services.  Exactly what services of the government do you think most people are willing to give up for this tax decrease?  And why hasn't the government gone ahead and made those cuts before giving the tax break?

So don't expect a whole bunch of gratitude for this tax break.  It's really not much of a break.

For everyone except the top earners, of course. ;)