Growth in Wages Shows Little Improvement, With Minimal Salary Gains Expected in 2012

Key Development: Wage gains are expected to range from 2 to 3 percent through the end of the year.

Potential Impact: Economic uncertainty has made salary planning difficult for employers.

Prospects are not promising for strong wage growth in the second half of 2012 as the economy struggles to find surer footing, recent salary forecasts and indicators showed.

Most forecasts for wage growth range from 2 percent to 3 percent through the end of the year.

A study by the National Employment Law Project, “Slower Wage Growth, Declining Real Wages Undermine Recovery,” found that employees are earning less today than they did a year ago, and wages have not recovered from the decline during the recent recession.

“Even as the economy has shown signs of picking up in 2012, weak wage growth is permeating the labor market from virtually all sides,” the nonprofit group said in the report, released in May. “Hourly wages are growing slower than they did before the recession; the real value of wages has fallen over the past year; new job creation has skewed to lower-paying jobs; and wages for new and returning entrants in the workforce are declining.”

“However you look at it, wages for most Americans are just limping along, and it's become a real sap on the recovery,” Christine Owens, executive director of the group, said in a statement.

Employers Reluctant to Increase Payrolls

Slow wage growth does little to prop up consumer spending and help the economy gain strength, said Kathryn Kobe, an economist who helped develop and maintains the monthly Bloomberg BNA Wage Trend Indicator, a forward-looking tool to gauge wage trends.

While the WTI does not forecast the magnitude of wage growth, it does indicate the direction, Kobe said. Over its history, the WTI has predicted a turning point in wage trends six to nine months before the trends are apparent in the monthly employment cost index (ECI), which measures the cost of doing business, especially key variables such as wages, benefits, and bonuses. A sustained increase in the WTI forecasts greater pressure to raise private-sector wages, while a sustained decline is predictive of a deceleration in the rate of wage increases.

For employers, the WTI offers “an indication as to when the wage pressures are beginning to build in the economy and when you can sort of expect to have to bump your wages up to be competitive,” Kobe said.

“The ECI is only now just beginning to show the increases that the WTI has been predicting for probably over a year now,” Kobe said.

Given the uncertainty in the U.S. economy and in Europe, many employers find it difficult to make hiring decisions. Because of the uncertainty, “businesses say 'I have no idea where the economy is going. I don't want to hire a lot of new people now,'” Kobe said. “And if they're not hiring a lot of new people, it's not strengthening the labor force enough to make the people who are already working have a strong base for demanding higher wages.”

The Labor Department's Bureau of Labor Statistics reported July 6 that employers added fewer than 100,000 jobs to payrolls in June for the third consecutive month. Although small, the increase in payrolls was enough to keep up with the growth of the labor force and keep the unemployment rate unchanged from May at 8.2 percent.

For 2013, the jobless rate is forecast at 7.8 percent, according to the July 10 survey from Blue Chip Economics Indicators, a survey of top business economists.

“We have an economy that has a lot of headwinds in it,” Kobe said. “Not all of those are being picked up in the indicators we have. You look at those last several quarters of the WTI and they're showing a very clear picture. There is a lot of uncertainty in the economy right now. And uncertainty is pretty hard to put in as an indicator.”

At the higher end of the wage growth spectrum, a recent Hay Group report said employees can expect median base salary increases of up to 3 percent in 2012 and 2013.

The Hay Group forecast is relatively steady across most industry sectors, and after factoring in annualized consumer price index growth at 3 percent, expected employee wage growth is in line with inflation, the firm said.

While most industry sectors also are consistent with the median base salary increase, including industrial, retail, and financial services sectors, the economy affects industry sectors differently.

Certain job groups in health care, such as nursing and clinical employees, should expect a wage increase of about 2.5 percent, while employees in the oil and gas sectors could receive median salary increases of about 4 percent by the end of the year.

“Even though the economy continues to show signs of a slow recovery, we do not expect most employees to receive increases at the levels seen in the years prior to 2008 for awhile, when median increases were tracking between 3.5 percent and 4 percent,” said Tom McMullen, a Hay Group reward practice leader.

The outlook for wage growth in 2013 is marginally better, Hay Group said July 18. While employees received annual increases of 4 percent to 4.5 percent a decade ago, the trend has slowed to 3 percent, McMullen said.

According to Hay Group's research, executives, middle management, supervisory, and clerical positions can expect 3 percent median pay increases next year, and that margin holds fairly steady across most industries, McMullen said.

Hay Group's forecast results were based on data provided by 350 U.S. organizations from March to June.

Latest Wage Trend Indicator

Private-sector workers should see somewhat stronger wage increases in the coming months, according to the final second-quarter Wage Trend Indicator released July 17 by Bloomberg BNA. The index rose to 98.67 (second quarter 1976 = 100) from 98.42 in the first quarter.

The latest WTI “indicates the pace of wage growth will strengthen but probably not dramatically so,” Kobe said.

“We're still seeing mixed signals in the labor market, with small, steady job gains,” Kobe said.

Annual wage gains overall in the private sector are expected to reach at least 2 percent, compared with a 1.9 percent year-over-year increase in the first quarter, as measured by the Labor Department's employment cost index, Kobe said.

Reflecting recent economic conditions, five of the WTI's seven components showed positive contributions to the revised second-quarter reading and two components were negative.

The positive factors were forecasters' expectations for the rate of inflation, compiled by the Federal Reserve Bank of Philadelphia; job losers as a share of the labor force and average hourly earnings of production and nonsupervisory workers, both reported by the Labor Department; and the share of employers planning to hire production and service workers in the coming months and the proportion of employers reporting difficulty in filling professional and technical jobs, both tracked by Bloomberg BNA's quarterly employment outlook survey.

The negative factors were industrial production, measured by the Federal Reserve Board, and the unemployment rate, reported by the Labor Department.

For more information, see Compensation and Benefits Library's “Bloomberg BNA's Wage Trend Indicator” chapter.

By Michael Trimarchi