Rethink pay trends, Yellen told

Wage inflation returning to radar for some economists

WASHINGTON -- Federal Reserve Chairman Janet Yellen says wage gains remain slow and that's a sign there's plenty of slack in the labor market. Some Wall Street economists disagree.

Yellen has cited three gauges showing hourly earnings, employment costs and compensation in arguing that salary increases are muted. Yet economists including Torsten Slok of Deutsche Bank say other data are better indicators of where pay is headed: higher.

Slok, Deutsche's chief international economist in New York, cited a speed-up in pay of production workers, which rose to a year-on-year rate of 2.3 percent in April from 1.3 percent in October 2012.

Faster growth of labor compensation would have big economic implications and play into the debate over how fast the economy will grow and whether the Fed needs to keep stimulating it. It would increase household spending, which accounts for about 70 percent of gross domestic product. Since compensation represents about two-thirds of company costs, it would also put upward pressure on inflation and make it harder for the Fed to keep interest rates near zero.

"We're starting to see some wage inflation," M. Keith Waddell, president of Menlo Park, Calif.-based staffing company Robert Half International Inc., told analysts on April 23. "We saw rising pay rates for our temporary staff."

Dean Maki, chief U.S. economist at Barclays in New York, forecast that core inflation will rise above 2 percent by the middle of 2015 as pay picks up. Core prices, which exclude volatile food and energy costs, rose 1.2 percent in March from a year earlier, according to the personal consumption expenditures price index. The Fed's target for overall inflation is 2 percent.

Yellen made a nod in her critics' direction last week by tacitly acknowledging that some indicators of wages have turned up, without changing her basic message.

"Most measures of labor compensation have been rising slowly -- another signal that a substantial amount of slack remains in the labor market," she told Congress's Joint Economic Committee on May 7.

Yellen, 67, is turning to wage statistics to help gauge labor-market tautness partly because of the murky signals stemming from the unemployment rate. Unemployment fell to 6.3 percent in April from a 26-year high of 10 percent in October 2009. Some of that, though, was driven by a fall in labor-force participation, to 62.8 percent from 65 percent.

"As the economy recovers, we might see labor-force participation strengthen, rather than continue to decline," Yellen said.

At the May 7 hearing, she didn't specify what constitutes maximum employment, saying she wasn't going "to put a percentage point" on that. In a March 31 speech on the job market, though, she did say that she and most of her Fed colleagues estimated that "maximum sustainable employment is now between 5.2 and 5.6 percent."

Former Bank of England policymakers David Blanchflower and Adam Posen urged the Fed in a paper last month to focus on labor compensation to determine the health of the job market, given the uncertainties surrounding the unemployment measure.

"If you start to approach full employment, you'll see it in wages," said Blanchflower, now a professor of economics at Dartmouth College in Hanover, N.H. Posen is now president of the Peterson Institute of International Economics in Washington.

Business on 05/14/2014

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