This is a repost from Forbes.
The June report was a doozy. If labor markets remain tight and wages don’t increase, profits will soar. That would be good for stock prices and your retirement plans, right? Not so fast.
Being able to save for retirement depends more on wages than rates of return, and a backlash against workers being left behind could destabilize markets. The dynamics depend on how answer to this puzzling question:
How can the labor market be so tight and wage growth so flat?
Economists are telling each other we haven’t seen rates this low (near 4%) in our lifetimes and we worry. Wages aren’t moving like we predicted. A key economic indicator to forecast stock prices and interest rate policy used to be the unemployment rate and every first Friday when the numbers came out were tense.
The inverse relationship between wages and inflation and unemployment rates is called the Phillips curve. But, real wages have been practically flat during this expansion (see clean wage data from the Brookings Institution and Economic Policy Institution). Wages rose 2.7% from a year earlier in June, below the 2.8% increase economists had expected. The increase may make little difference because inflation is also picking up and could soon outpace wages, meaning many workers have no real increase in buying power.
Should we say a prayer for the Phillips curve? Former Fed Board member and Princeton economist, Alan Blinder considers publicly if the Phillips curve is dead.
Question: Why have wages adjusted for inflation been practically flat during this expansion?
One Answer: States rights.
American governance structure is peculiar in that it gives states power in many areas including labor regulations like union rules, minimum wages, and prevailing wage laws. This control, coupled with the huge inequalities in political influence that tilt policies toward corporate interests, have worked to weaken one of the only labor market institutions that can enforce the Phillips curve: unions.
A 60 year old so-called “Right to Work” movement has led to policies that weaken labor bargaining power in states across the nation, which lowers wages as documented by the Labor Department. As revealed in a recent academic NBER paper, the pathway between state labor policies and the effective weakening of unions is through the rise and fall of the Democratic party.
The Right to Work movement is sometimes referred to as the “right to work for less movement,” writes a Loyola University professor. Right to work states ban voluntary union security clauses. These states have weaker unions which, according to the Economic Policy Institute, leads to below average wage growth. Libertarian think tank The Heritage Foundation disputes the relationship between wages and right to work laws; but not the relationship between right to work laws and a weakened Democratic Party.
Republicans have been passing laws state by state that bar unions and management from bargaining an automatic union fee collection in the private sector. This was extended to the public sector last month by the Supreme Court case called the Janus v AFSCME. When unions lose power, the Democratic party weakens, as do efforts to achieve higher minimum wages, strong prevailing wage laws, and mandated paid leave, which are all strongly associated with union lobbying efforts.
In the hey day of the Phillips curve, when it seemed to be holding, the unemployment rate and productivity trends were all you really needed to forecast profits, monetary policy and the direction of the real economy.
I am not sure why the Fed never took up measuring labor bargaining power. Former Fed chief, Alan Greenspan, keenly watched for labor power indicators, he told Congress in 1997 about the fear factor. Surveys of workers indicated people were afraid to leave their jobs because they didn’t expect to get better ones. The presence of job insecurity made the Fed chief confident stagnant wages would continue despite rising productivity and profits growth and inflation wouldn’t increase as the economy got better.
Here is a question I don’t know the answer to and I am open to hypotheses from readers:
How long can the political environment remain stable when workers’ wages continue to stagnant, the majority of the population can’t buy things and the sense of fairness erodes as labor productivity rises?
Did the Donald Trump victory in the four Rust Belt states give us a glimpse of the relationship between weak unions and populist politics?
A backlash would likely destabilize returns to retirement nest eggs.
Stay tuned as I explore tariffs, the economy and how those economic decisions could affect your retirement savings. Every investor, I found, is fascinated by the economy. You?