Goldman: U.S. Wages Catching Up With Productivity Is a 'Sobering' Prospect

  • Gap between wages, productivity has buoyed corporate profits
  • Margins could shrink by 10% annually if gap eliminated

What’s good for American workers may not be so great for their companies.

Goldman Sachs Group Inc. is worried that rising pay is closing in on the productivity gains of the past 15 years, erasing the margins businesses have counted on to boost their profits

If wages converge with productivity over the next three years, profitability will shrink by about 10 percent annually, strategist Charles Himmelberg wrote in a note this week.

While classic economic theory holds that wages and productivity should move in lock step, that hasn’t been happening in recent years as an oversupply of job seekers suppressed salaries. This divergence explains the lion’s share of U.S. profit growth from 2004 through 2014, according to Goldman’s estimates. In light of tightening labor markets in the U.S., the analysts say the trend is likely to reverse -- businesses are going to have to pay their workers more and it’s not going to come with any increase in output.

“We find the prospect of what a normalization would look like to be sobering,” Himmelberg wrote. “Rising wages are a threat to corporate profit margins.”

Investors have already started to fret, if market returns are any indication. S&P 500 Index companies that dole out the smallest share of revenue as pay have beaten those with the highest labor costs by 4.5 percentage points, the biggest gap to start a year since at least 2010, data compiled by Goldman Sachs Group Inc. and Bloomberg show.

Goldman’s calculations show wages rose 3 percent in the first quarter from a year earlier.

Higher wages may not be all bad for corporations. Goldman’s note doesn’t mention it, but workers with extra cash in their pockets will have more to spend, and consumption remains the engine driving the U.S. economy. That means businesses may be able to make up for reduced profit margins by selling a higher volume of goods. And more demand could boost firms’ ability to raise selling prices, alleviating some of the pressure on margins.

— With assistance by Lu Wang

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