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When Wage Gains Are Good News



Is the party over? Will the United Parcel Service Inc. settlement be a reverse of the Reagan-era air-traffic controllers' strike and change the balance of power between labor and capital in America? Will it boost wage costs for companies, renew inflation, and ultimately tank the stock market, a la 1987? Is this finally the rise in labor costs and harbinger of recession that most economists and Wall Street analysts have been predicting since unemployment fell below 6%?

It's time to get a grip. Real wages for the bottom half of the working population are moving upward for the first time in two decades, and that isn't bad news. Productivity can pay for modest pay increases while global competition should keep a lid on prices and outsize labor demands. The prosperity of recent years is finally being shared by those in the lower tier of the economy--and that is a cause for celebration, not despair.

In some ways, the UPS settlement is a watershed event. The first big strike in a decade was decidedly won by the Teamsters union, with help from the AFL-CIO. Surprisingly, the strike hit a chord. The public strongly supported the workers, whereas it backed President Reagan against the controllers in 1981 and was hostile to strikers and their unions right up to the day the UPS workers walked off their jobs. Clearly, most Americans believe it is only fair for the low-wage UPS workers who haven't had a raise in years to get a decent pay hike.


Workers are playing catch-up everywhere. After six years of strong economic growth and low unemployment, the tight labor markets are finally allowing the less-skilled to join their college-educated brethren in prosperity. Real wages have gone up 1.4% in the past year ended in June, the strongest gain since the 1970s. Earnings for the lower-paid 60% of the workforce are rising faster in 1997 than for the top 40%. The growing gap in the distribution of income (the biggest in the industrialized world) has at last begun to reverse itself. But it will take at least four more years of 1% real wage growth to simply restore worker income to 1989 levels.

Cassandras who have been shouting "inflation is coming, inflation is coming" for years are now ready to glom on to rising wages as proof that the end is near. They feel triumphant because, contrary to expectations, recent government revisions in the numbers on productivity growth showed virtually no improvement through the current business upswing. The double-digit growth in corporate profits must therefore derive from holding wages down, they argue, rather than boosting productivity. If that's right, when wages begin moving up, companies must raise prices to retain their margins, triggering an inflationary spiral. And if they can't raise prices, profits will suffer--and the stock market with it. That is where America is poised today, they say.

Not so fast. Even using the government figure of 1% productivity growth for the past five years, real wages can grow by the same amount without putting much pressure on margins or prices. Evidence? Even as real wages have started moving up, inflation has actually been falling, while gains in corporate profits chug along at a terrific pace. We suspect that UPS's own productivity growth is much higher than 1% per year, and over the next five years that growth will pay for a big chunk of the settlement.


In fact, we believe the government numbers on productivity are seriously flawed. How else to explain the following anomalies:

-- For decades, productivity rates in service industries tracked productivity in manufacturing. In the mid-80s, they diverged. Today, manufacturing productivity is rising at about 3.5% annually, while services are nearly flat. What happened? Service productivity suddenly became "hard to measure."

-- Growth in productivity used to parallel sales per employee. In the early '90s, they separated. Inflation-adjusted sales per employee went up 4.8% in 1994, 9.3% in 1995, and 4.6% in 1996, while the government's figures on productivity growth continued along at 1%. What changed?

-- Ditto for the relationship between the growth in productivity and real personal income. Before, they moved in tandem, but in the '90s they went their separate ways. Over the past year, to cite the latest anomaly, per-capita income rose 2.7%. Productivity? You know the answer.

Something has clearly changed. Many academic economists dismiss the views of CEOs such as General Electric Co.'s John F. Welch who insist their companies' productivity is surging as they move into a new economy of information technology and globalization. With all due respect to the economics profession, why ignore so much anecdotal evidence from so many people in so many industries? We side with the practitioners. To many CEOs in the country, from Silicon Valley to the Ohio Valley, the message in the productivity debate is simple: "It's a measurement problem, stupid." As long as the government numbers on service-sector productivity remain squishy at best, we strongly suspect that productivity growth is higher than the stats show--and may well be accelerating.

In the New Economy, the business cycle is not repealed but it appears there is more room for faster growth, lower unemployment, and higher real wages without igniting inflation. But workers should take heed. The rising tide will not benefit everyone equally. Those with top skills and education benefited first and most from this economic expansion. Many of the part-time UPS workers throwing boxes into bins are students earning money to pay for college. After graduation, they will go on to make much more than those who remain full-time sorters, regardless of renewed union strength. This may ultimately be the lesson of the UPS strike.

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