Why Are US Wages and Compensation Subdued?
Policymakers Fischer and Brainard on US Economy, Monetary Policy
Policymakers’ views
Our focus in this series is to assess the various aspects of the US economy that Federal Reserve policymakers Stanley Fischer and Lael Brainard have touched on in their respective speeches at different forums. In the previous article, we looked at the slack in the US labor market.
Another aspect of the labor market that has disappointed policymakers is the depressed level of rise in wages and compensation. Fischer, vice chair of the Federal Reserve, commented that nominal wage growth has remained subdued. He added that real wage growth, which is adjusted for inflation, has also been subdued, possibly because of low productivity growth.
Brainard, a member of the Federal Reserve’s board of governors, said, “Perhaps the most striking evidence in support of continued labor market slack is the absence of any acceleration in wages and prices.” She added that the Fed’s main measures of wage inflation show that compensation is rising at a 2%–2.3% pace, which is not too different compared to earlier years when the labor market was not so healthy.
What does this mean?
Generally, a labor market that is returning to health sees a robust rise in wages and compensation. This is because companies begin head hunting and skilled personnel are able to negotiate their wages upward when there’s steady improvement in demand conditions. This wage and compensation increase in turn fuels the level of inflation in the economy.
Even though job additions have been strong, a subdued rise in wages and compensation shows that even though some people have found jobs, they have been unable to negotiate favorable wages. This could possibly be because people who have been unemployed for a while are happy to be working again, even for low wages. Without the fall in crude oil prices, consumer spending would not have been healthy given the subdued compensation levels.
For investors in consumer-oriented mutual funds such as the Fidelity Select Consumer Discretionary Portfolio (FSCPX), a rise in consumer spending is a positive sign. Stocks of The Walt Disney Company (DIS), Nike (NKE), and L Brands (LB) form ~17% of the fund’s portfolio.
Due to the close association with inflation, a rise in wages and compensation can alert you about a rise in inflation and make inflation-protected mutual funds like the Vanguard Inflation-Protected Securities Fund Investor Shares ETF (VIPSX) and the Fidelity Inflation-Protected Bond ETF (FINPX) popular again.
Let’s look at our two policymakers’ views on monetary policy in the next article.
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