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We have recently received several questions about the economic impact of wage increases.

In the charts below we show how the Average Hourly Earnings estimated by the Department of Labor has increased significantly on both a dollar and year-over-year basis. This reflects the significant increase in minimum wage among other things, and it is our view that as AHE continues to trend upwards it can only be additive to our call on Q4 accelerating inflation.

Wage Inflation, not Deflation...  - a1

Wage Inflation, not Deflation...  - a2

Although, on the margin, this is an inflationary factor, it would be wrong to interpret the data too broadly.  The total number of individuals who received a raise directly as a result of the increased minimum is estimated by some think tanks at as few as  4.5 Million, and that population will likely be heavily weighted in labor intensive portions of the service and manufacturing industries rather than spread across the economy as a whole.

Conference Board Manufacturing data for instance suggests that per-unit labor peaked at year end 08 and then fell off during the first half as layoffs continued and capacity remained slack–meaning that as wages have increased, total employment has declined and that the aggregate labor costs for industrials has been flat to negative.

Andrew Barber

Director