Wednesday, May 11, 2005

US Wages Declining, Tough Times Ahead

Financial Times:
[...] Real wages in the US are falling at their fastest rate in 14 years, according to data surveyed by the Financial Times.

Inflation rose 3.1 per cent in the year to March but salaries climbed just 2.4 per cent, according to the Employment Cost Index. In the final three months of 2004, real wages fell by 0.9 per cent.

The last time salaries fell this steeply was at the start of 1991, when real wages declined by 1.1 per cent.

Stingy pay rises mean many Americans will have to work longer hours to keep up with the cost of living, and they could ultimately undermine consumer spending and economic growth.

Many economists believe that in spite of the unexpectedly large rise in job creation of 274,000 in April, the uneven revival in the labour market since the 2001 recession has made it hard for workers to negotiate real improvements in living standards.
What is not often discussed in the press is the serious wage deflation taking place in the Information Technology industry in North America. I lived and worked in the USA during the 90's, and was responsible for hiring into IT. I estimate that wages across that industry have fallen, in absolute terms, 25-30% since 2001.

My contention is that we will see wage deflation continue, against a backdrop of increasing inflation based on two drivers:
  • increasing energy costs
  • US intentionally inflating away its staggering debt
Thus the jaws of a nasty economic vice are gradually squeezing the middle class, eroding the standard of living. To add to the potential woe, tax laws in the US have incented many Americans to spend their equity gains in a hot housing market. Many have exhausted their borrowing capacity, and are extremely exposed should housing prices suffer a setback. Things are precarious.

Adding more flood water behind the dams is another lag between market realities and the US car industry. A significant down cycle for the automakers will undoubtedly spill across the border into the Ontario autoparts industry.

These vectors on the economy are sufficient reason for the Martin government to cease using money we will need in the future to buy himself another few months (at best) in office. Tough times are ahead. Martin's Santa Bag federalism is sheer insanity. If the Finance Minister had any sense, he would distance himself from his desperate boss.