Several reports have been published this year documenting rising wages in China. In “Wage Rises in China May Ease Slowdown“, the WSJ notes that these increases may help lower the impact of a slowdown in China as workers have more money to purchase goods (although it is not clear to me how much this helps if a lot of the money goes into buying foreign goods as the article suggests could happen).
The current and projected jumps in labor costs are dramatic:
“…wage income for urban households rose 13% year-on-year in the first half, and average monthly income for migrant workers rose 14.9%, according to data from China’s National Bureau of Statistics. A labor ministry survey of 91 cities in the first quarter showed demand for workers outstripping supply by a record amount, pointing to low unemployment…
…At current rates, China’s private-sector manufacturing wages will double from their 2011 levels by 2015, and triple by 2017, eroding competitiveness and denting the exports that have played a key part in China’s early growth.”
These wage hikes are coming off low levels. For example, as of February of this year, Hon Hai Precision Industry Co, the company that manufactures Apple (AAPL) iPads, reported a 10% increase in base salary for its factory workers to 2,200 yuan ($345) per month.
Moreover, the supply of new, young workers will decrease thanks to China’s one-child policy:
“In 2005, there were 120.7 million Chinese people aged 15-19, according to United Nations estimates. By 2010, that had fallen to 105.3 million, and by 2015 it is expected to dip to 94.9 million.”
Finally the government is forcing the minimum wage and benefits higher:
“China is committed to sharply raising minimum wages, which puts pressure on employers to raise salaries for higher skilled workers. Beijing also has increased requirements for severance payments, which discourages layoffs unless business drops severely.”
It will be interesting to watch what happens to China’s economy as its manufacturing competitiveness declines slowly but surely with the increase in wages.
Several times on these pages, I have “celebrated” various confirmations of reflation as indicated by the soaring salaries of CEOs, largely through stock-based compensation. On October 10th, the New York Times printed the results of a study that confirmed what many of us already knew from informal observation: the wages of U.S. workers have fallen at a faster rate than they did during the recession. This “deflation” is working in the exact reverse of the trend for those who who hire these workers and run their companies! From “Recession Officially Over, U.S. Incomes Kept Falling” (NY Times via CNBC):
“Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.”
This is a sobering statistic that has potentially dire implications for the economy in general. Compare this situation to that in China where an on-going study in the New York Times concludes that China’s government has propped up its banks and large corporations at the expense of Chinese workers (see “As Its Economy Sprints Ahead, China’s People Are Left Behind.”):
“Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future.
Indeed, economists say this nation’s decade of remarkable economic growth, led by exports and government investment in big projects like China’s high-speed rail network, has to a great extent been underwritten by the household savings — not the spending — of the country’s 1.3 billion people.
This system, which some experts refer to as state capitalism, depends on the transfer of wealth from Chinese households to state-run banks, government-backed corporations and the affluent few who are well enough connected to benefit from the arrangement.”
Neither system, in the U.S. or China, appear stable to me. With China dependent on the income (or rising debt) of U.S. workers to keep its exports alive, these systems of increasing inequity actually start to look increasingly unstable. I will be monitoring these processes even more closely going forward. They are certainly deflationary, not inflationary.
The venerable cartoon series “The Simpsons” has a strong following that has kept the show alive for a record 23 seasons. However, NPR reports hat rising production costs threaten to deliver the last laugh on The Simpsons. 20th Century Fox Television wants the show’s actors to take a 45% pay cut on the $8M a year they currently earn. A $4.4M salary sure sounds fantastic to 99% of us, but in wages and income, relativity counts. These actors have certainly built lifestyles to match their salaries and a sudden and drastic cut could actually cause at least a few of them some hardships (hopefully just in the short-term).
If negotiation go poorly, the actors will be left with zero pay. Hopefully, they will still get a cut of the treasure trove that awaits in syndication. NPR states that “…one analyst noted that ending the show would make it worth even more in syndication — perhaps $1.5 million for each of the show’s 506 episodes, which would bring in something like $750 million.” This means the studio actually has a large incentive to end the series rather than continue to pay high production costs to keep the show going.
For more, see or listen to “Do Rising Costs Have ‘The Simpsons’ On The Ropes?“
The spotlight is shining bright these days on executive pay. I have cited several stories regarding the tremendous increases in executive pay that occurred in 2010 that resoundingly reversed (and then some) stagnation and sometimes declines in executive pay in 2009. (See for example, “Pay rises 13% for CEOs at Canada’s top 100 public companies” and “CEOs recover all the pay they lost during the recession” or review articles under the category “Salaries“).
This weekend, I noted two state-based stories on executive pay that demonstrated how dramatic a turn-around has occurred in the pay for specific executives.
In “Lucrative paydays for corporate chiefs“, the Atlanta-Journal Constitution reports:
“Here’s one measure of just how good it was: $232.9 million.
That’s the total compensation that the chief executives at Georgia’s 25 most-valuable public companies took home last year, according to The Atlanta Journal-Constitution’s review of the annual disclosures required by the Securities and Exchange Commission…
Here’s another measure of just how lucrative 2010 was: 29 percent. That’s the average pay raise the 25 executives saw last year.”
In “Arizona CEO’s median compensation surged 48% in 2010“, The Arizona Republic reports:
“Sparked by rising profits and rebounding stock prices, the median compensation for chief executive officers and chairmen at Arizona-based public companies surged 48 percent in 2010, hitting a statewide record of $1.54 million.
Plus, hefty pay packages were shared more broadly by other top officials at 43 corporations based in the state. Some 74 senior executives below the CEO level earned at least $750,000, up from 63 who earned that much the year before.”
In both cases, compensation swelled partially thanks to a strong rebound in the stock market, meaning that corporate executives have greatly benefited from the reflation generated by economic stimulus and/or monetary easing. As I have mentioned in previous posts, strong corporate profits have supported all forms of equity-based wealth and effectively beat back the ghosts of deflation in 2010.
Of course, the huge irony is that poor employment reports and stagnating personal income data tell a different story. For example, after Friday’s awful jobs report and the on-going dire news coming from the housing market, you would be excused for assuming the entire country had dipped back into a poverty-stricken recession. Such is definitely not the case for the big winners of 2010.
In “Back in the green: CEO pay jumps 13 per cent“, Globe and Mail reports that CEOs at Canada’s top 100 public companies received average pay raises of 13% in 2010. This comes on the heels of dismal pay performance in 2009 and 2010 where pay was essentially flat. 2010’s pay hikes is similar to the double-digit pay gains Canada’s CEO typically experienced before the recession.
The article includes an interesting discussion of “performance share units” which calibrates performance-based pay to the company’s relative performance to its peers. This method prevents pay hikes from general market forces that the CEO does not control, like the rising price of oil.
In “Salaries at Apple, Google a big investor concern – Commentary: Higher pay, benefit costs driving up expenses,” Marketwatch writer John Shinal laments that:
“Given that every full-time employee gets health insurance and other benefits that make up anywhere from a quarter to half their overall compensation, and that health-care costs are rising in the double-digit percentages, it’s safe to assume that U.S. tech companies are seeing employee costs rise in the double figures, as an annual percentage.”
In 2009, wages in high tech went up 5-10%. So Shinal’s assessment is consistent with a labor market that was relatively tight even at the height of the recession and beginning of the recovery.
This is a good news/bad news tale of inflation.
The good news is that the salaries and benefits for college presidents at public universities held steady the last academic year (2009-2010) as reported by AJC.com in “Study: Recession hasn’t cut college president salaries“. This was no easy feat given the generous compensation:
“The median total compensation for 185 presidents running the country’s largest public research universities was $440,487. About one-third earned more than $500,000 and the 10 highest earned more than $725,000 each. Ohio State University President E. Gordon Gee received $1.8 million, the highest.”
Of course, staying flat is nothing compared to the 27% hike in median pay for the nation’s CEOs in 2010, but those increases only restored CEOs to pre-recession levels. A University of Georgia spokesman defended the pay for presidents by pointing out the limited supply of qualified candidates for the job.
The bad news about inflation on college campuses is that tuition increased. Students paid a whopping 25% more in tuition in the last academic year. Assuming most of them will not grow up to be CEOs, they can probably look forward to working in a company where their salaries will not keep pace with the head honcho. (The average compensation package increased 2.1% last year).
In “Australia Boom Pays Men Without Degree More Than Bernanke“, Bloomberg uses a gimmicky title to call attention to the tremendous gains in Australian wages during the current boom in commodities:
“Wages grew 3.9 percent in the three months through December from a year earlier, the fastest pace since the first quarter of 2009, according to government figures. When the central bank decided March 1 to keep its official cash rate at 4.75 percent, it said wage growth had returned to levels reached before a 2009 decline.”
Bloomberg also reports that Australian unions are seizing this opportunity to press for higher wages:
“The Construction, Forestry, Mining and Energy Union, Australia’s biggest in the building industry, sought pay increases in February of as much as 24 percent over four years. The Communications, Electrical and Plumbers Union is seeking annual pay rises of 5 percent over the next three years, almost double the inflation rate.”
The article speculates that tight labor conditions and rising wages could place additional pressure on the Reserve Bank of Australia to restart its rate-hiking campaign. Such speculation could explain the Australian dollar’s rapid rise to new all-time highs against the U.S. dollar.
Source: dailyfx.com charts
Disclosure: author is long FXA (Rydex Currency Shares Australian Dollar Trust ETF)
Charles Evans, President of the Chicago Federal Reserve, recently spoke at The Darla Moore School of Business giving “A Perspective on the Current Economy.” The press summarized the lecture by indicating Evans remains a “dove” on inflation:
“The Fed is more sanguine about inflation than some because an outbreak of higher prices is missing a key ingredient – higher wages, Evans said…A weak labor market will continue to exert important downward influences on inflationary pressures, he said.” (from Marketwatch)
A cynical person could say that Evans does not fear inflation because QE2 has failed to provide the one single thing that Americans care most about in the economy right now: jobs. Instead, I will note that this commentary comes immediately on the heels of an op-ed piece from Laurence H. Meyer, a former governor of the Federal Reserve, who opined that inflation is not a problem…and even if it became one, the Fed would quickly get it back under control. Since the Federal Reserve cares more about inflation expectations than current levels of inflation, it makes a lot of sense that a good amount of energy is spent trying to convince people that no matter what the data say or the anecdotal evidence (or Inflation Watch postings for that matter!), the future is fine.
However, the Wall Street Journal noted that the commentary from Evans runs directly counter to the warnings of coming inflationary pressures from FOMC voting member Charles Plosser, president of the Philadelphia Federal Reserve Bank (see here). Apparently, the gameplan and script are not receiving the same reading on the team!
- Tired of defections to Facebook and elsewhere, Google is offering all of its employees a 10 percent salary increase.
- Twenty-five employees fired by Digg were immediately approached by other companies, including Twitter and Groupon.
- Talented college grads with no work experience are reportedly getting job offers paying $120,000 or (much) more.
- I.T. job postings are booming.
- Start-ups are being acquired just for their employees. Derek Andersen: “[L]ook at the number of companies getting acquired for talent by Google, Facebook, and now LinkedIn. Seems like someone is getting bought for talent every other week. It hasn’t been that way for a couple of years. A top tier developer friend recently told me that he’s been encouraged by many to start a company and sell to Google/Yahoo in 6-months for a big check just to acquire the team. I believe it’s 100% realistic.”
Something is happening here, and it sure ain’t deflation.
Employing workers will get even more expensive in 2010. The National Association of State Workforce Agencies (NASWA) reports that at least 33 states will raise payroll taxes next year to shore up depleted unemployment insurance funds. Click here for complete story….
For the first time in a year, U.S. companies are planning to boost payrolls and investments, indicating the nascent economic recovery will be sustained into 2010, a private survey showed.The percentage of businesses expecting to hire staff over the next six months exceeded the share projecting more firings by 4 points, the first positive reading since July 2008, according to figures from the National Association for Business Economics issued today in Washington. The spread in favor of those looking to spend more on new equipment was even larger.
The survey also showed that companies have begun raising prices of their products:
[P]rice increases are starting to become more prevalent as demand improves. Twenty-three percent of the companies surveyed by NABE this month said they raised prices since the prior survey, up from 8 percent in July. Just one out of every 10 said they had to cut what they charged customers, down from two out of 10 three months ago.