Are Real Wages Finally Firming?

We have previously commented on the issue of lackluster U.S. economic growth.  (See our blog from  Jul-12)  Among the possible causative factors, relatively modest gains for real wages has been highlighted by many economists.

We have seen unemployment steadily decline to near record lows.  At the same time, we have not seen much in the way of wage gains and we continue to have work force participation rates at near record lows.  This is a combination of economic metrics that is probably not likely to continue.

Perhaps things are beginning to change.  Target recently announced that it would raise its minimum hourly wage to $11 in October and then to $15 an hour by the end of 2020.  Over the last two years, Walmart has implemented a number of gradual increases in its starting and minimum pay scales.

Since pure altruism is an unlikely cause for these improvements in pay scales, it stands to reason the employers, particularly in the historically high turnover retail industry, are responding to market conditions.  Employee turnover, which leads to training new workers, is expensive.  Logic suggests that pay scales have to be at a level that will bring in new hires and then provide sufficient opportunities for advancement.

While some may see rising real wages as just another increase in costs that could further squeeze retailer’s razor thin margins, investors may want to adopt a more positive view.  Rising wages should increase worker’s purchasing power and, perhaps, encourage more individuals to reenter the workforce.  Both of these trends could enhance purchasing power, which, in turn, could generate improving economic growth and investment returns.

It is helpful to remember that the U.S. economy is largely consumer driven.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®