Worker gains threatened by a rise in interest rates


For the first time in years, wages and salaries show signs of exceeding inflation and giving workers an honest piece of the economic recovery.

And they certainly can't allow that at the Federal Reserve.

The Fed will almost certainly increase short-term interest rates another quarter point today, continuing the tightening it began two years ago after deciding the country was recovering from terrorist shock and corporate fraud.

The trouble is that wages and salaries weren't recovering two years ago and are only starting to revive now, improving the lot of the worker in ways that other indicators have not. By persisting in raising rates to try to slow growth and stifle inflation, Fed boss Ben Bernanke may end up stumbling in the most important part of his job: benefiting the average American.

The ballooning corporate profits of recent years (they've nearly doubled since 2001) finally show signs of being plowed back into hiring and capital projects, which increase the bidding for workers and add to take-home pay.

Last week's employment report showed that average hourly wages rose 3.8 percent from April 2005 to last month, the best 12-month performance since 2001. Average weekly earnings did even better, rising 4.1 percent for the 12 months ending in April. That was the biggest 12-month increase since 1998, according to the Labor Department's data.

Of course consumer prices are higher, too, thanks to soaring energy costs. That eats into wage gains. Even so, weekly earnings outpaced inflation by 0.6 percent for the 12 months ended in March (April inflation results aren't in yet), which represented the first year-over-year gain since June and the best in more than a year.

Hourly wages were merely even with inflation for the 12 months ending in March. But that was progress: There hasn't been a year-over-year, after-inflation gain in hourly wages since late 2003. Most months they lose ground to consumer prices.

Even as corporate profits have swollen as a portion of the economy, wages and salaries have shrunk. In early 2001 they made up 49.5 percent of the gross domestic product; last year they were less than 46 percent - a huge decline.

You probably won't hear about compensation anemia by talking to corporations. The worker costs that matter for many of them include health insurance benefits, which of course continue to soar. Tell a CEO he's shortchanging employees and he'll offer you a close look at his Aetna bill, which if it's like other medical plans, has been rising by something like 10 percent a year.

But that doesn't do workers' wallets any good and harms the ones who share insurance costs.

What matters for workers is wages and salaries and that category has been a drag on the economy for five years.

Now that layoffs and outsourcing appear to have tailed off and economic momentum has accelerated, workers finally seem to be grabbing a share of the economy's gains.

The country has consistently added at least a hundred thousand jobs a month since last fall. Unemployment has fallen from 6.3 percent in 2003 to 4.7 percent now.

Wages and salaries are ticking up even as medical inflation shows signs of waning - which may give employers room for better raises.

And yet the Fed keeps on tightening, threatening to bounce workers as they approach the prosperity turnstile. (Full disclosure: I have a home equity line of credit whose rate goes up along with the Fed's.)

The Fed's job is to let the economy grow without igniting inflation. Certainly energy prices have fueled inflation, and certainly wages and salaries are part of the inflation equation.

But neither are the threats they used to be. Energy's share of the economy is far less than it was in the 1970s. Recent oil-price gains won't be sustainable.

Worker salaries haven't even breached the parapet as a problem. And the economy is far from the inflation-risking red zone; industrial capacity utilization is only 81 percent, its long-term average.

A former chairman, William McChesney Martin, famously said that the Fed's job is to remove the punchbowl just when the party gets going. But his punch, I suspect, contained brandy, vodka and champagne. So far in this recovery, workers have been sipping lemonade and Shirley Temples, in small paper cups.

Please, sir. May we have some more?

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