After steadily chugging along, American workers’ pay and benefits costs abruptly slowed to a snail’s pace at the start of the year, slipping to the lowest increase since government record keeping began 17 years ago.
The government’s employment cost index grew by just 0.4 percent for the first quarter of the year, down from increases ranging from 0.7 to 0.9 percent during the previous four quarters.
Companies’ spending on workers’ pay and benefits grew by 3 percent from a year earlier, for the smallest hike in two years. And Midwest firms had the smallest annual increase, 2.5 percent, the government said Thursday.
But wait a minute before cutting up the credit cards and canceling the take-out pizza.
In a record-setting, robust economy that continues to stump nearly all economic experts, the facts about wage increases are not what they seem. Nor do the old economic theories seem to hold up anymore.
Take salaries.
While wage hikes seem stuck in the lower digits, experts say the reality is that unusually low inflation means workers have been taking home better wage increases in recent years than they have seen in many years.
“The average person has seen his average hourly wage go up a pretty good amount,” said Stan Shipley, an economist for Merrill Lynch in New York.
When adjusted for inflation, average hourly wage increases are running at about 4.3 percent, which, he said, is near a 30-year high.
A similar rethinking is needed, experts added, to toss aside years of economic wisdom. The old wisdom said that a tight labor market translates into high wages and high inflation. The new wisdom says that is not so. But most experts seem at a loss to explain why.
And so, despite a 4.2 percent jobless rate, the lowest in 29 years, wages have not soared out of control and inflation has been slinking along at equally low rates. The inflation rate, say most economists, is running at 1.8 percent, and it is likely to climb to 2.5 percent later this year.
“It’s so perfect. You have low unemployment. You have a good wage rate and low inflation. You can’t get it any better than this,” Shipley said.
Indeed, there were other numbers released by the government on Thursday to back his upbeat view of the economy.
The government said that the number of workers who lined up to file claims for unemployment benefits last week was smaller than expected. There were 294,000 new claims filed last week, 20,000 fewer than the previous week, and the biggest one-week drop in three months, officials said.
A decline in new unemployment claims is typically viewed as a sign layoffs are receding and companies are holding on to their workers.
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And sales of new homes rose 2.1 percent in March, the government said, marking the first increase since last November, when sales reached a record high.
But for Capt. Michael McElroy, the dream of a new home is still just that. McElroy, who pilots the First Lady of Chicago, which sails on the Chicago River, said that his last raise was about a year and a half ago.
McElroy lives in a Southwest Side apartment with his wife, Colleen, and their two children. Their biggest financial challenge is establishing credit to buy a home, he said.
“With two small children and only one wage earner, it’s difficult.” he said.
Still, Cynthia Latta, an economist at Standard & Poor’s DRI, an economic forecasting service in suburban Boston, said, “it’s hard to see how the economy could get much better.”
She suggested that some people may be suffering from “money illusion,” the term used by economists to describe a perception gap in the value of money.
When inflation is high, for example, workers may revel in high pay increases that actually leave little money in their paychecks, she said.
But in general, “When you look at the consumer confidence numbers, you see that people realize that they are better off,” she said.
Carol Freeman, owner of Freeman Design Ltd. in Evanston, agrees with such a positive view of the economy. She has rewarded her employees with what some might consider generous pay hikes.
“Fortunately, my business has grown each year for billing, which has made it easier to give the raises,” said Freeman, adding that she gives her two full-time designers between 5 and 10 percent salary increases yearly, along with profit-sharing bonuses and 401(k) profit sharing.
However, like many lower-wage workers, auto mechanic/technician Fee Griffin sees an economy where it is not always easy to get ahead.
He’s worked for CarX Muffler and Brake in suburban Harvey for the past year and has asked for a raise several times but not received one. He is making less now than he was four years ago. Now, he budgets his life from check to check.
Still, most low- and medium-income workers can thank the longest peacetime boom in the U.S. economy for real wage gains as of 1997, said Jared Bernstein, an economist with the Economic Policy Institute, a liberal think thank in Washington, D.C.
And while Bernstein was surprised by the latest government report, which showed the slowdown in employment costs, he said other reports indicate that workers’ wage gains are not likely to disappear overnight.
Michael Niemiri, an economist with the Bank of Tokyo-Mitsubishi in New York, suggested it was “not surprising” that employment costs had slowed down.
The downturn for the nation’s factories, stirred largely by the declining demand from foreign consumers, has led manufacturers to trim wages, he said.
Other factors also helped drive down the employment costs figures, experts said.
There was a drop in home refinancing during the first quarter from a year earlier, which led to a decline in salaries and commissions for finance workers
Wall Street’s renewed surge also lowered the burden on companies to transfer money to their pension funds, as stock values drove up many firms’ pension investments, experts said.
In addition, a number of companies were spending less on worker’s compensation bills, experts added, as a result of reforms that have been put into effect lately by state legislatures across the nation.
In one area, however, employers saw their costs rising: health-care expenses.
The amount spent by employers on health-care benefits grew by 3.7 percent during the first quarter, marking the highest single increase since the last few months of 1994, said Jim Houff, a senior economist with the U.S. Bureau of Labor Statistics.
“It (health-care costs) is finally getting to where people predicted,” he said. With the savings accrued by shifting to managed care running out, employers are facing increased premiums, he said. “That makes sense,” he added. “We knew it was coming.”