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Net Net: Promoting innovation and managing change

Fed's trillions haven't helped worker paychecks

Employment Cost Index up 0.2% in Q2

The central bank printed $4.5 trillion and all we got was a lousy 0.2 percent wage increase.

While that sounds like a T-shirt for policy geeks that one might buy at the shore, it actually pretty accurately describes the plight of the average American worker. After years of easing never seen before in global central banking history, the Federal Reserve's efforts have amounted to little when it comes to stimulating "good" inflation, particularly in terms of wage increases.

The employment cost index, an otherwise secondary data point that suddenly has taken on more importance, painted a bleak picture for workers in its latest update Friday.

On a quarterly basis, it showed wages and salaries increasing just 0.2 percent, believed to be the lowest three-month move ever for a data set that goes back to 1982. That translated to a 2 percent annualized gain in compensation costs, according to the Bureau of Labor Statistics.

What's more, the scant growth went mostly to government workers, who saw a 0.6 percent increase, while the private sector was flat. On a 12-month basis, private worker compensation rose just 1.9 percent, which actually was a slight decrease from the 2.0 percent at the same time in 2014. Wages and salaries alone grew 2.1 percent, which actually was an increase from the 1.8 percent a year ago.

Janet Yellen
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Taken together, the numbers seem less an indication of the rip-roaring economy Fed stimulus was supposed to generate and more an indicator of the same old, same old: Outsized benefits to stock market investors and debt-heavy corporations, with little feeding back into the real economy.

"We keep seeing these predictions that things are going to get better, but they just haven't," said Irene Tung, senior policy researcher at the National Employment Labor Project. "The Fed has been holding off on raising interest rates to try to move things along, but it's just clear that they should stay the course and not raise interest rates at all in the near future given what we're seeing."

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Market participants have been making bets and staking positions on a Fed seemingly ready to tighten at some point this year. The current anecdotal consensus is that the first hike in more than nine years will happen in September, though the futures market at the CME has assigned a zero percent chance of that happening. The greater likelihood, according to traders, is December for the move that will take the Fed off its zero-bound range where it has been since December 2008.

As far as policy goes, next Friday's BLS nonfarm payrolls report could be a difference maker, particularly if it reflects the same lack of wage pressure.

"We still think September is the most likely time for the first hike of the fed funds rate, but you would have to be less confident today than you were yesterday with the new data," said Ed Keon, managing director of QMA, which manages $118.2 billion for clients. "The Labor report is always important, but it's going to be even more important than usual. If we have a weak report it probably means the Fed is on hold into December if not into 2016."

However the central bank proceeds, it will have to be careful that its actions are not disruptive to an economy that has seen fragile growth—with a mere 1.5 percent increase in GDP for the first half—and inflation still not cracking the 2 percent barrier.

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Chair Janet Yellen and her fellow members of the Federal Open Market Committee seem fairly satisfied with the 5.3 percent headline unemployment rate, which rises to 10.5 percent when accounting for discouraged workers and those employed part time for economic reasons. But they've continued to express concern about the lack of wage growth, something that experts attribute to a variety of factors.

"Employers seem to have a lot of choice. ... The patterns of technology and globalization have been working in their favor," said Harry Holzer, professor of public policy at Georgetown University. "They find all sorts of new ways to save on labor costs. When they do that, they just don't need to pay higher wages and hire and retain these workers."

Those kinds of conditions create a difficult environment for tightening monetary policy.

"We're disappointed, but it's not surprising," Tung said. "It's a good reminder that we can't just rely on the market to address the wage issues that we have."