Pay checks likely to grow much fatter, data suggest



The prevailing view on Wall Street is that investors can no longer count on consumers to do the heavy lifting for the economy, because they are laden with debt, pressured by high energy costs, and can't use their home equity as an ATM anymore.

But Morgan Stanley economist Richard Berner's worry is the opposite of those wringing their hands about financially stressed consumers: He thinks Americans may start to see significant pay increases.

So far, evidence of that is scant. In fact, economists said that workers have struggled the last few years with stagnant pay as they have had to compete with overseas workers for jobs.

But with the unemployment rate now below 5 percent, and hourly earnings accelerating to a five-year high for the year ending in February, Berner sees change coming. In particular, there is evidence of pent-up demand for workers, he said.

Pointing to the Job Openings and Labor Turnover Survey done by the Labor Department, Berner notes the rate of unfilled jobs reached the highest level since the late '90s - especially in transportation, finance and manufacturing.

But that's a short-term change. Berner said he believes demographic trends are going to limit the number of available workers for some time. That will likely mean companies will have to do more to attract and keep workers - raising pay levels and then passing the extra costs on to their customers.

He warns bond investors to be particularly attentive to the possibility, because interest rates go up during times of inflation. That causes bonds to lose value.

Berner's concerns are derived largely from a study released in March by the Federal Reserve and the Brookings Institution think tank's Panel on Economic Activity.

The researchers identified three basic trends that could keep the labor supply tight for the foreseeable future: baby boomers getting older, the leveling-off of women in the work force, and less interest in jobs by teens.

While women poured into the labor market for three decades, starting in the mid-'60s, the study says participation peaked in the 1990s. The researchers note participation has declined recently - perhaps caused by poor job prospects. But there are also indications that the movement could be family-related - women leaving the work force to start families or care for children, Berner said.

He notes participation by 20- to 54-year-old women has dropped 2 percentage points during the past five years, and that the decline is sharper among women with children under 6.

And while more women sit on the sidelines, he said, teen participation also has been declining for nearly 30 years - from a peak of 72 percent in the mid-'70s to 53 percent last year.

While the causes can be debated, Berner notes a Bureau of Labor Statistics study showing that since 1994 teens have been bypassing summer and after-school jobs, and apparently focusing on school. Some might argue that teens couldn't find jobs, but Berner said that between 1994 and 2000, job growth was booming, and teens enrolling in summer school increased to 27 percent from 19.5 percent.

If pay actually increases, more people will likely see the value in getting a job. And as they come into the work force, the pressure to boost pay could decline. Yet, Berner says the long-term trend is toward tighter labor markets, and consequently rising pay.

"For fixed-income investors," he said, "these developments have a clear bearish bias."

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