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
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. …