Why Wages May Begin Inching Up

It's no coincidence that Corporate America has enjoyed four fat years while its workers have been served up some pretty slim pickings. After all, keeping a tight lid on labor costs played a large part in making companies more competitive and securing strong profits. Now, profit growth is slowing--net income for the 900 companies in BUSINESS WEEK's Corporate Scoreboard was flat in the first quarter. At the same time, wages are creeping up. How much? David Wyss, an economist at DRI/McGraw-Hill, voices the majority view, predicting that wage growth will accelerate "slightly" this year--to 2.9% from last year's 2.7%. A few economists, though, think wage pressure could be more intense.

The consensus argues that in the hotly competitive global marketplace, employers will be ever-vigilant and won't soon loosen their grip on corporate purse strings. By the same token, most economists say, workers who figure they're lucky to have a job won't press for big wage increases.

A BACKLASH? But the more pessimistic wage-watchers look at ominous recent straws in the wind. First, there's the political backdrop of "worker backlash," says Morgan Stanley & Co. Chief Economist Stephen S. Roach. For years, labor took it on the chin, not sharing in Corporate America's gains, and this is finally sparking a reaction among workers--and in Congress. Legislation to raise the minimum wage by 90 cents to $1 from $4.25 an hour has garnered surprising support in Washington, and it may yet pass.

Roach believes the higher costs could be dramatic. It's true that only 3.7 million workers earn the minimum wage, which means a direct boost to overall wages of a scant 0.2% in each of the two years over which an increase would be phased in. But Roach believes other low-wage workers will also get increases as managers try to fend off further antibusiness moves in Congress. He says the wage boost could amount to a full percentage point over two years, pushing the employment cost index (ECI) for wages and salaries to 3.4% this year and 3.8% in 1997--hardly amounting to galloping wage inflation, but still well above the consensus forecast of around 3% for each year. The first quarter ECI report affirms upward pressure: Wages and salaries jumped 1%, pushing the March, 1996, over March, 1995, growth rate to 3.2%.

Also pushing wages up will be cyclical pressures, and those might be stronger than most experts believe. Roach is looking for gross domestic product growth of 4% in the second and third quarters of this year. William Dudley, chief U.S. economist at Goldman, Sachs & Co., believes that monetary policy has been relatively easy and also forecasts a pickup in growth.

With unemployment at 5.6%, heightened demand for workers may force employers to pay up for good workers. In a recent survey, the Conference Board found that 43% of human-resource directors at large companies report difficulty in recruiting and keeping high-quality workers--from entry-level managers to technical workers.

Finally, economists are casting a wary eye toward the commodity markets. The big worry is that higher food and energy prices might eventually be matched by faster wage growth. Even if they aren't, the days when Corporate America could offset commodity price gains by slashing the labor bill are probably over. And passing on steeper grain and gasoline costs in higher end-product prices isn't an option. Add it all up, say the pessimists, and profit margins are sure to be squeezed.

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