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Stagnant wages pose risks to US economy


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Stagnant Wages Pose Added Risks to Weak Economy

August 11, 2002

Although the recession has ended, the wages of more than
100 million workers are still stagnant, endangering the
consumer spending that sustains the fragile recovery.

The stagnation in total wages paid to the nation's
employees outside of government is now a year old,
according to newly revised government data, which paints a
bleak picture of the economy. The rising cost of
company-sponsored health insurance is also taking a bite
out of take-home pay. Rather than pay the premium increases
themselves, companies are deducting much of the additional
cost from employee paychecks.

The recovery's survival may be riding on how people
perceive these constraints on their wages, which they are
just beginning to notice, says Richard T. Curtin, director
of the University of Michigan's Surveys of Consumer
Sentiment. "People are telling us about smaller paychecks,"
he said. Meager raises or no raises at all are a problem
for them, he added, "but what they are really noticing is
the loss of overtime hours, which effectively lowers their
income. And they are beginning to cut back on spending."

Not everyone accepts the new wage revisions published by
the Commerce Department as proof of stagnation. A broader
measure of personal income, one that includes items like
Social Security benefits and unemployment insurance as well
as wages, has risen recently. Some forecasters have seized
on this improvement to argue that the economy is generating
enough new income to strengthen the recovery by early next

But there is an obstacle to optimism. The personal income
numbers, while broader than wages, do not include capital
gains from the sale of stock. This huge source of income in
the late 1990's has shrunk considerably since early last
year, judging from the shortfall in expected tax payments
last April 15, economists at the Congressional Budget
Office say.

The bottom line of the various conflicting numbers is that
they seem to cancel each other out, leaving insufficient
income growth, for the moment, to convert a weak economy
into a strong one. "What we have is a grinding slowdown in
the incomes that people have available to spend, from
whatever the source," said Lee Price, chief economist for
the Senate Budget Committee.

Some workers have resisted the downward pressure on their
wages, only reluctantly agreeing, for example, to scale
back raises in exchange for company payment of most of the
increase in health insurance premiums. That is the
concession that 2,700 employees of the Hershey Food
Corporation accepted in June, after a six-week strike. In a
weak economy, with unemployment rising, the bargaining
power of the nation's wage earners has diminished.

"We see two reasons why employers will ask their workers to
pay a bigger portion of the health insurance increase this
year than in past years," said James Foreman, a managing
director of Towers Perrin, a consulting firm that
specializes in compensation. "Profits are squeezed so
employers have to shift more of the cost to employees, and
it is harder and harder to get a job, so companies don't
have to worry about employees going somewhere else."

Dan England, chief executive of C. R. England Inc., a
long-haul trucking company with headquarters in Salt Lake
City, is among those not yet worrying about defections
among his 3,200 drivers, although freight traffic is
picking up. None of his competitors have raised pay, Mr.
England says, and he will not be the first. He has not
granted a raise in two years; his drivers earn 25 to 40
cents a mile, and gross $35,000 to $40,000 a year.

"We are just starting to ask our customers to pay higher
freight rates," Mr. England said. "Until we get those, we
would not even consider raising wages." Meanwhile, he has
passed on to his drivers in each of the last two years a
larger percentage of the increase in health insurance

So has Robert Waggoner, chief executive of Burrelle's
Information Services, in Livingston, N.J. Its 2,700
employees compile media references for clients, most of
them corporations. Mr. Waggoner said that his workers,
whose wages average $10 to $12 an hour, are paying as much
as 15 percent of this year's increase in health insurance
premiums, up from 9 percent last year. The annual raise,
however, has been restricted to the 3.5 percent awarded in
2000 and 2001. That is down from 5 percent a year in the
booming late 90's.

"As business turns up and the market gets tighter, then we
would have to competitively increase the raises," Mr.
Waggoner said. But business has not turned up, nor has he
seen any sign that an upturn is approaching. So in addition
to larger deductions for health insurance premiums,
overtime hours have been cut, further reducing take-home

The stagnation in the nation's total wages and salaries,
adjusted for inflation, affects 110 million workers, most
of them below management ranks. It results not only from
meager raises, but also from cutbacks in hours, the
disappearance of nearly 1.7 million jobs since March 2001
and the rise in the unemployment rate, which now stands at
5.9 percent. Until these problems developed, the total
outlay for private-sector workers had climbed by more than
5 percent a year starting in 1997, reaching a peak annual
rate of $4.190 trillion, adjusted for inflation, in the
fourth quarter of 2000.

And then, over the next year - much of it while the economy
was in recession - $94 billion in pay disappeared, with
only $9 billion recovered in a mild rebound so far this

"It is really amazing how stretched out the wage
deceleration has been," said Jared Bernstein, a labor
economist at the Economic Policy Institute. "It is
testimony to how much upward pressure on wages there was in
the tight labor markets of the boom years, and how much
time it is taking to unwind that pressure."

Translated into production and spending, the wages and
salaries lost so far were almost enough to shave a full
percentage point off economic growth, which helps to
explain why the economy grew at an annual rate of only 1.1
percent from April through June. The $4.1 trillion in wages
and salaries represents, after all, almost 40 percent of
the nation's economic activity.

But wages and salaries are not the only measure of how
income is doing. The Commerce Department's Bureau of
Economic Analysis publishes a broader indicator called
"personal income." Wages and salaries are the largest
single item, of course. But personal income also includes
unemployment payments, Social Security benefits, income
from self-employment, rental payments to landlords,
interest earned from savings accounts and bonds, and
employer payments for health insurance and pensions.
Although this last outlay does not go directly to
employees, the government counts it as income to them on
the ground that it is made by their employers on their

Viewed so broadly, personal income surged in June, the
latest month for which numbers are available. Gains in many
of the nonwage items have more than offset the stagnation
in wages and salaries.

With personal income rising, Chris Varvares, president of
Macroeconomic Advisers, a forecasting firm in St. Louis,
sees a robust recovery by early next year. In support of
that view, he points not only to the improvement in overall
personal income but to what he sees as an end to the
stagnation in the wages and salaries component. The
stagnation, he says, is giving way to growth.

There is also a boost to income from the Bush
administration's tax cut, which lowered income tax
deductions this year for millions of wage earners, putting
a bit more money in their take-home pay.

"People don't think about their wages," Mr. Varvares said,
contradicting Mr. Curtin's latest survey findings. "They go
out and buy what they need and because it is cheap relative
to their income, they have money left over. They don't look
at their wages; they observe their finances over time."

There is guesswork, however, in some of the calculations of
the Bureau of Economic Analysis. For example, bonus
payments, which companies have increasingly used in lieu of
raises, are included in personal income, although the
bureau learns the size of the actual payouts only late in
the year. In the interim, it makes assumptions.

"We assume that the growth pattern of irregular pay is the
same as regular pay," said Carol Moylan, chief of the
bureau's personal income division. "If it is not, and it
sometimes is not, we have a problem."

Capital gains, which include earnings from the sale of
stock, are another black hole in calculating what is
happening to people's incomes and therefore to their
spending power in these critical early months of the
recovery. The bureau does not attempt to include them in
its measure of personal income, although capital gains
added greatly to income in the boom years but much less
over the last 18 months, judging from the sharp fall in tax
payments last April.

Only about half of the $150 billion in tax payments
expected that month actually arrived. The shortfall
suggests to economists at the Congressional Budget Office
that the stock market sell-off wiped out capital gains and
the tax revenue they generate. Canceled or shrunken bonuses
and worthless stock options might also be factors, they
said. Whatever the explanation, the tax payment shortfall
indicates a loss in personal income of $200 billion or
more, most of it among wealthy Americans.

Just how much they lost is not known yet. Many wealthy
people ask for and get postponements in filing their tax
returns. But the advance billing is not good. "We have
arrived, on balance, at income stagnation," Mr. Bernstein
said, "and that is a problem for the economy."