The Challenge of Wage Growth

I guess you can never underestimate the human propensity for self-delusion.

Perhaps it’s just a part of our DNA. Something nature put into all of us to get us out of the cave every morning. The feeling that we matter…

Of course, it affects some more than others. Somehow, the world just won’t function unless they are running the show.

It could be that bloke at a local sporting club, who can’t quite delegate or hand over the reins. They smile and nod sanctimoniously, not listening to a darn thing anyone says.

Or perhaps it’s all those thousands of bureaucrats and pollies, flying in to climate summits from all over the world. Not the kind of people to mix it with others on public transport, they each take a taxi, or uber, to their expensive hotels.

And what do they do?

Collectively they decide how much they will let the Earth heat up for the rest of this century. Will it be two degrees? Or 1.5 degrees? They tinker with their models to come at the answer. To impose their models on everyone else.

Quite how you input all the variables accurately — yes, every single one (man-made or otherwise) — into a climate model is beyond me. Not only do they need to predict how many cows on Earth will be belching away decades from now, but also the volume, and constitution, of their flatulence.

Good luck getting all that right.

Take another aspect…population. Have a debate about carbon footprints if you wish. But how can anyone predict how many souls will be living on planet Earth 50 years from now?

Surely population is as important as any other factor.

Yes, the UN has projections. Right out to end of the century. But how do they account for disease or famine? Or, medical breakthroughs that could see lifespans grow exponentially.

In this free report, economy expert reveals four ways you could cash in on the global infrastructure boom. Download now.

If wages increased, wouldn’t we have more to spend?

Economists can also suffer from the same delusion — that their models can predict what the world economy will do in the future. World growth, GDP, inflation, you name it. There’s an economic model that claim to predict any, or all, of these.

However, it goes further than that.

It also comes down to the actual economic principles themselves. And there is nothing that proves this more than wages.

Unemployment is low in many parts of the developed world. Perhaps as low as it will go this cycle.

The next thing on the economic agenda is wage growth. Nearly every single day, some economist will be spruiking higher wages, as the final panacea for everyone and the economy.

If wages could just increase enough, they argue, we’d all have more money to spend. In turn, that would lead to higher demand and activity.

Economic theory has always stated that once you get to full employment, wage growth should follow. It comes back to the good old supply-demand curve.

Once you reach the limit of supply, and demand remains strong (or increases), prices have only one way to go. That is, up.

Of course, quite what represents ‘full’ employment is a matter of debate. While the general notion is basic — that anyone looking for work has found it — establishing a percentage is a bit more subjective.

It also opens another argument about the number of hours worked. That is, whether those who are working are getting the number of hours they want.

If we take the US’ current 3.9% unemployment rate, if that doesn’t equate to full employment, then it has to be as close as the US has come in many decades.

Yes, wages in the US have been on the rise. As Forbes reported in September, up 2.9% since the previous year. It’s the highest growth in nine years.

But here’s the kicker. After taking inflation into account, Forbes also reported that growth in real wages came in at a measly 1% — barely enough for anyone to notice.

What does wage growth really mean?

Therein lies the challenge of wage growth. As wages are a component in all goods and services, any wage increase typically flows into the cost of goods. Meaning that even if you get a pay rise, an increase in the cost of living will erode it all away. Especially so if you have a centralised wage system.

The real hit comes, though, if inflation continues to kick up. That is when central banks start increasing the cash rate, meaning higher costs for anyone with a loan.

While your pay packet remains stagnant in real dollars, the cost of borrowing, like a home loan, for example, eats further into your pay. Those already struggling, will likely struggle even further.

On the surface wage growth is a good thing…that is, a desirable thing. However, it can lead to many being worse off.

Trying to manufacture wage growth, without a corresponding increase in productivity, means the cost of living simply goes up for all.

The other thing about wages is structural. It’s something every developed country has witnessed for decades.

As it becomes cheaper to make things offshore, we have seen more and more corporations move their manufacturing operations overseas.

However, the problem comes when you try to reverse it.

Imposing tariffs or surcharges on those companies who manufacture offshore — whether domestic or international companies — can lead to a trade war. Like the tit-for-tat that we are witnessing now.

This is what can really bring a global economy to a halt. And that’s when people will be much more worried about keeping their job, than fighting for a pay rise.

Regards,

Matt Hibbard,
Editor, Options Trader

PS: Population growth is booming — find out how you can make the most of a massive global infrastructure rush in this free report. Get access now.


Matt Hibbard is Money Morning’s income specialist. With nearly three decades in the markets, Matt has traded just about every asset class there is. The one thing that has stuck with him over this time is a very simple premise. That is, it’s the cash a company generates that ultimately determines its value. Sure, some stocks might fly away to multi-digit gains. But unless these companies can convert the ‘story’ into real money, the market will eventually find them out. And when that happens, the share price quickly falls back to Earth. That’s why, over at Total Income, Matt is on the hunt for the next generation of dividend-payers. Stocks that should be able to pay their shareholders reliable and rising dividends into the future. Matt is also the editor of Options Trader, where he shows subscribers how to use basic options strategies to generate income. This is income they can generate on top of regular dividend payments. Matt doesn’t play the prediction game, where the aim is to be proven ‘right’. Instead, his goal is to generate as much income as he can for his subscribers, irrespective of whether the market is going up or down.


Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia