In the News

Job, Salary Data Send Mixed Signal

Anemic employment growth points to a slowing economy. But robust, albeit uneven, wage increases could spur another Fed hike.

By Molly Hennessy-Fiske, Times Staff Writer
August 5, 2006

A weak jobs report Friday provided further evidence of a slowing economy and ammunition for the Federal Reserve to stop raising interest rates. Wage inflation, however, continued to be above the Fed's comfort level, thanks in part to workers like Carlos Gonzalez.

The 33-year-old Bellflower resident, a program manager at a Torrance aerospace parts supplier, said he just got a 31% raise, bringing his pay to $57,000.

"It surprised me because personally I never expected this," said Gonzalez, a high school graduate and father of two who has been with his employer for a decade and worked his way up from the shipping department.

Average hourly wages rose 3.8% year-over-year in July, according to the Labor Department report Friday, high enough to raise eyebrows at the Fed, economists said. But some analysts said such wage gains are not a major cause of rising inflation because many workers are not sharing in the pay raises. High prices for energy and other commodities, not wages, are the main culprit behind rising inflation, these analysts said.

"Wages are still very much under control," said Bernard Baumohl, director of the Economic Outlook Group in Princeton Junction, N.J.

The average wage is being pushed higher by employers in such industries as aerospace, financial services, computer technology and certain types of manufacturing. They are pushing wages up to attract highly skilled workers or retain the trained workers like Gonzalez whom they already have, analysts said.

But pay raises for most middle- and lower-income workers — in such industries as retail, construction, hotels and restaurants — are still relatively modest or nonexistent, they said.

That is typically not the type of wage pressure that prompts employers to raise prices, Baumohl said.

Given wage stagnation among lower- and middle-class workers, further Fed rate hikes would hurt the very workers whose spending is driving the economy, he said.

"We have to remember that most of the stimulus — most of the shopping and spending in the U.S. — comes from middle- and low-income people. And they have not seen an increase in wages," Baumohl said.

Meanwhile, the subpar net increase of 113,000 jobs in July and a surprising rise in unemployment to 4.8% from 4.6% gave the Fed enough evidence to pause its rate-hiking program at its next policy-making meeting Tuesday, many analysts said. That would become the first such break since the Fed starting tightening credit two years ago.

The July job gain was down from 124,000 in June and the 150,000 expected by economists, and well below the average monthly gains last year.

"I think the signal to the Fed is: For goodness' sake, don't raise rates anymore…. Usually when unemployment starts rising, the Fed starts easing," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

A Reuters poll, conducted after the employment data were issued, found that 17 of 22 of the biggest Wall Street firms foresaw the Fed keeping rates on hold Tuesday.

The trend toward higher wages for highly skilled workers is evident at Ace Clearwater Enterprises Inc., an aerospace parts supplier that employs 168 people in Torrance, including Gonzalez.

After recruiters began luring away program managers, engineers, machinists, tool designers and high-skilled welders, the company was left with about 10 openings it has been unable to fill for about eight months, said Gary Johnson, the company's vice president. Two months ago, when the company doled out cost-of-living increases, skilled workers received more: raises of 5% to 8%, sometimes more.

Software engineers along with sales, marketing and financial service workers in Los Angeles are being recruited with higher pay, bonuses and relocation costs, said Max Shapiro, chief executive of San Francisco-based recruiting firm PeopleConnect, which has an office in Los Angeles.

Shapiro said wages had risen 12% during the last two years for software engineers he places; they are up 10% to 12% for financial workers.

"Employers are more inclined to do whatever they can to keep an employee because it's more difficult to find good people" given low unemployment, he said.

On the other end are workers like Lazaro Soto, 78. Working as a houseman for 21 years at the Hilton Los Angeles Airport hotel, he now earns about $18,000 and hasn't had a raise recently. He is one of dozens of workers there trying to unionize in order to win better pay and benefits.

"Things are getting more expensive — the rent is going up, gas, the food. With the same salary, it's difficult," Soto said.

Average pay has gone down in Los Angeles County in recent years, particularly for the middle class. Los Angeles posted the smallest average weekly wage increases among the 10 largest U.S. counties from 2004 to 2005, at 0.3%, according to the Labor Department. Between the third quarters of 2002 and 2005, average yearly pay fell by about $125, to $45,746.

Bankers, lawyers, advertising executives, stockbrokers and credit union employees fared well, but those working at restaurants, hotels, beauty salons and repair services saw their wages fall, according to reports from the state Employment Development Department.

From 2004 to 2005, average weekly wages fell for workers in mining, trade, transportation, utilities, data processing, publishing, insurance and real estate, while workers in education and health services saw wages rise by 1.7% and salaries of those in financial activities rose by 3.2%, according to the Labor Department.

"What you have is concern that the Southern California economy is hollowing out," said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp. "The high-skilled jobs are doing well and a lot of the low-skilled jobs are growing, but a lot of the middle is disappearing."

Rising average wages are not inflationary yet partly because productivity per worker is also growing.

Some analysts, however, say rising wages will still cause concerns at the Fed and might prompt it to keep raising rates.

"These are not numbers that tell an inflation fighter to go on vacation," said Ken Goldstein, an economist at the New York-based Conference Board Inc. The Fed fears "businesses complaining about high labor costs even as prices at the supermarket go up," he said.

And as growth slows, productivity is likely to follow, and the wage gains for higher-income workers could push overall inflation up, said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis.

Employers' unit labor costs — wage and benefit expenses for a given amount of worker output — are going to rise "as productivity slows down, and that could still put pressure on prices going forward," Anderson said.