Coming Soon: Paychecks with More Zeros ; after a Fallow Period, Greenspan and Others See Business Expanding and Wages Rising

By Ron Scherer writer of The Christian Science Monitor | The Christian Science Monitor, April 26, 2004 | Go to article overview

Coming Soon: Paychecks with More Zeros ; after a Fallow Period, Greenspan and Others See Business Expanding and Wages Rising


Ron Scherer writer of The Christian Science Monitor, The Christian Science Monitor


Last year Alan Greenspan received a very modest 1.5 percent pay raise, moving his salary up to $174,500 per year. The year before was only a little better: an increase of 3.1 percent.

Even if most Americans don't make that much money, those small salary increases will resonate with most wage earners. But, according to Mr. Greenspan, better days are ahead. He recently told a congressional committee that he could foresee a time during this economic cycle when business would expand, adding new jobs. The labor market would tighten and voila: Companies would pay more for their carpenters, pipe fitters, and draftsmen.

"The way that happens is that they start to hire and bid up wages in the process, and that's the process by which compensation of employees rises relative to the national income and eventually starts a new cycle," says the Federal Reserve chairman.

If Greenspan is correct, it would be a big, and potentially important, change in the economy. Every 1 percent rise in salaries adds about $53 billion to the economy. That's equal to one-third of this year's tax cut, some of which will then expire. A 1 percent rise in salaries may be enough to power consumer spending, which represents about two-thirds of the economy. And it might keep the economy from faltering next year.

"We will need rising incomes to sustain economic growth in the absence of a tax cut and low interest rates," says Sung Won Sohn, chief economist at Wells Fargo Banks in Minneapolis.

If employers do become more generous, it would mark a change. Last year, wages rose 2.9 percent and the year before 2.7 percent. By contrast, during the boom years of the 1990s, they rose as much as 5 percent.

At the end of this week, investors will get a chance to see if there has been much change when the government releases the first- quarter employment cost index, which measures how much wages are rising. Economists are anticipating another modest gain.

"It [the ECI] has been as high as 1.3 percent and is averaging about 1 percent per quarter," says Roger Kubarych, an economist with HVB Group, Germany's second largest bank. "If it goes much beyond that, it would be a red flag to the Fed" because of inflation concerns.

Mr. Kubarych, who closely watches labor trends, agrees with Greenspan's conjecture that wages will start to rise. But he expects the timing to take longer. "I think there's another year when wages and salaries will show only a slight increase," he predicts.

One reason that compensation is remaining modest is that wage hikes are not high on workers' negotiating lists. Instead, the major issue is health benefits, since employers are trying to rein in or transfer rising costs to workers. …

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