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U.S. experiencing 'a marked shift in bargaining power towards lower-income workers'

·5 min read
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Large and popular companies including Chipotle (CMG), McDonald’s (MCD) and Amazon (AMZN) are raising their starting salaries, and experts believe that the trend will likely put more pressure on businesses of all sizes to offer higher wages to stay competitive.

"Recent wage growth has been strongest in the low-wage service industries where labor markets are most unusually tight," Goldman Sachs analysts wrote in a May 13 note. "This pattern is consistent with widespread anecdotes of service-sector employers raising wages in response to labor shortages — for example, Amazon and Walmart raised wages for almost 1 [million] employees in recent months, while McDonald’s and Chipotle announced pay increases this week — and is especially notable given that unwinding composition effects remain a drag on measured wage growth."

The pandemic's influence on consumer demand, businesses' abilities to stay open, and government stimulus in the form of increased unemployment benefits have all contributed to a situation where workers feel empowered to ask for more.

The Goldman note added that this "most likely reflects a marked shift in bargaining power towards lower-income workers due to the more generous UI benefits."

(Chart: Goldman Sachs)
(Chart: Goldman Sachs)

Goldman analyzed the New York Fed’s Survey of Consumer Expectations and found that respondents said the "lowest wage" they would accept for a new job "for lower-income workers has spiked by 21% since last fall, while reservation wages for higher-income workers remained near trend."

A separate Bank of America note from May 14 also flagged that wages were rebounding in industries with "persistent chronic labor shortages" like construction and food services, but "the greatest wage increase" was in high-demand jobs amid the pandemic such as transportation (drivers), and housing (realtors, agents, and other related roles).

"For example, job postings for 'drivers', 'agents', 'realtors', and 'mortgage loan officers' surged during the pandemic relative to pre-pandemic levels and saw the strongest boost in salary in job postings," the economists stated. 

Contract drivers paid by Amazon, including Ayodeji Akinsanya, collect bags of free groceries to deliver from the Bread for the City social services charity during the coronavirus disease (COVID-19) outbreak, in Washington, U.S. May 5, 2020. The charity is sending out as many as 500 or 600 bags a day using the drivers. REUTERS/Jonathan Ernst
Contract drivers paid by Amazon collect bags of free groceries to deliver from the Bread for the City social services charity during the coronavirus disease (COVID-19) outbreak, in Washington, U.S. May 5, 2020. REUTERS/Jonathan Ernst

'Running a small business is hard enough'

Business owners, meanwhile, are concerned about their ability to recruit workers.

As the U.S. economy recovers from the pandemic, companies across the board are trying to hire back the millions of workers they lost as a result of the pandemic-inducted shutdowns and the resulting recession.

More states are ditching unemployment benefits to further incentivize people to seek employment, and the pressure to increase wages coming from large corporations is adding more stress to small businesses when trying to recruit workers.

"Large chains are having to raise wages because they are being forced to compete against government handouts,” Corina Morga, president and owner of Maryland-based CR Construction Services, and a member of the Job Creators Network, told Yahoo Finance.

Raising wages to compete with unemployment benefits was a possibility for tech giants like Amazon “but it's a lot tougher for small businesses like mine,” Morga added.

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Morga also expressed concern for contractors who work with large businesses: “Is McDonald's going to raise the contract price for their small distributors, like those who make the bread? Running a small business is hard enough without Biden's big government creating unnecessary barriers to our recovery."

Some business owners strongly believe that unemployment benefits are distorting workers’ preferences when seeking employment.

Businesses in New Jersey, for instance, “are offering higher pay and other incentives, but jobs still remain unfilled as we head into our peak economic season,” Michele Siekerka, president and CEO of the New Jersey Business and Industry Association, told Yahoo Finance. “We need to be holding people accountable and avoiding fraud, which costs our unemployment insurance fund.”

Siekerka added that one way to wean people off of the federal benefits program could be by New Jersey considering a “lump sum payment upfront in order to motivate people to return to work now,” and also to provide tax credits for businesses that are struggling to raise wages to attract workers.

“Many folks could be dipping into their own personal savings to raise wages and that’s what you want to avoid,” she added.

Stephen Baldwin holds his fist in the air outside a Subway restaurant during a strike aimed at the fast-food industry and the minimum wage in Seattle, Washington August 29, 2013. Fast-food workers went on strike and protested outside restaurants in 60 U.S. cities on Thursday, in the largest protest of an almost year-long campaign to raise service sector wages. REUTERS/David Ryder (UNITED STATES - Tags: CIVIL UNREST BUSINESS FOOD EMPLOYMENT)
Stephen Baldwin holds his fist in the air outside a Subway restaurant during a strike aimed at the fast-food industry and the minimum wage in Seattle, Washington August 29, 2013. (REUTERS/David Ryder)

Effects of big company wage

Previous research has shown that when companies like Amazon and Walmart (WMT) raised their starting wages to $15 an hour in 2018, the 10% increase in Amazon’s salary “led to an average increase of 2.6% among other employers in the same commuting zone,” one study found.

It's also worth noting that the pandemic has placed a special burden on workers being unable to find child care, which for many is a pre-condition to return to work.

"It is hard to know exactly when in the next few months that labor supply and wage growth will normalize, since some supply constraints from school closures and health risks are rapidly retracing, but disincentives from UI benefits will persist in most states until early September," Goldman Sachs economists stated. "Our best guess is that labor supply constraints will keep labor markets somewhat tight and push wage growth moderately above 3% in the near term, but fade in the coming months and disappear by the fall." 

Another potential effect is related to the federal minimum wage: In March, some Democrats tried but failed to pass a new $15-an-hour federal minimum wage.

Many states have enacted higher minimum wages as compared to the federal minimum wage, which has been $7.25 an hour since 2007, according to a tracker by the Economic Policy Institute.

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And with some of the country's biggest employers raising their starting wages, there's "a bit of an organic move towards higher minimum wages,” Gregory Daco, chief U.S. economist at Oxford Economics, told Yahoo Finance.

"Overall," Daco added, "it’s a good thing to be raising the wages of lower income individuals because they tend to have a stronger propensity to spend from an economic perspective."

Aarthi Swaminathan is a senior reporter for Yahoo Finance.

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