Credit U.S. Economy, Not Just Tax Cuts, for Wage Hike Promises
(Bloomberg) -- A spate of companies have promised employee bonuses and wage hikes following the passage of U.S. tax reform. Those gestures owe to economic calculus, not just policy change.
Wells Fargo & Co., Fifth Third Bancorp and AT&T Inc. are among corporations that rushed out pledges for pay perks after the passage of the Republican tax plan on Wednesday. The legislation will slash tax rates for corporations and on repatriated offshore earnings, which its supporters say could unlock funds for business investment.
While President Donald Trump may try to claim credit for the compensation boosts, none of the companies are claiming their motivation is purely altruistic. Most were probably under pressure to lift pay whether tax reform passed or not as they compete for an increasingly limited supply of available workers. Unemployment has dropped to its lowest level since 2000 and job openings are elevated. For months economists have been expecting wages to pick up in response to the taut conditions.
“Businesses aren’t just giving money away,” said Scott Brown, chief economist at Raymond James Financial in St. Petersburg, Florida. “It’s the tightness in the labor market.”
Eight of the 12 Federal Reserve districts reported stronger wages in the central bank’s latest Beige Book, a collection of anecdotal reports about economic conditions around the country. Chief executive officers cited labor costs at the greatest expense pressure facing their companies in a Business Roundtable survey for the fourth quarter -- the first time in six years that it topped the list.
Some of the companies pledging increases in response to the tax plan have nodded at how employment conditions are pushing them to pay more.
“In our retail business, in our operations, especially at the lower levels of our employee base, there is organic inflation going on” in wages, Tayfun Tuzun, chief financial officer at Fifth Third, said in a Dec. 7 conference call.
It could be that tax cuts, by giving the companies more cash, provide them the confidence to give pay increases they would have otherwise hesitated on for fear of dinging their profit margins and upsetting investors.
Fifth Third is raising its minimum hourly wage to $15 and expects to distribute a $1,000 payout to more than 13,500 employees. The company said the tax legislation “allowed the bank the opportunity to reevaluate its compensation structure” and share the benefits.
Evidence does suggest that to date, employers have been working hard to avoid higher payroll costs. For one thing, earnings have been surprisingly slow to pick up, baffling economists from the Federal Reserve to Wall Street. For another, companies are increasingly investing in labor-saving software and technology, a sign that they’re trying to substitute capital for labor as the need to pay more bites.
That said, some corporations were finding ways to deliver pay increases even before the policy change. Wells Fargo boosted its minimum hourly pay rate to a range of $13.50 to $17 an hour at the beginning of the year, a 12 percent increase from the prior minimum rate, based on a January conference call. This year’s increase to $15 is only an 11 percent hike.
And there’s reason to believe that pay could head up in 2018, even without a tax overhaul. Small businesses have been reporting that job openings are hard to fill, for instance, and a rising share have ranked labor quality as their most important problem. That suggests desperation is rising for qualified workers, which could mean raises are in train.
What our economists say...When it comes to wage pressure, “the point to stress is that it’s happening, and it’s happening because of economic fundamentals -- not necessarily because of what’s in the reform. The way it could add to economic growth, and wage increases, and so on, is if companies do believe that this is going to benefit them, they will do more investment.”
--Yelena Shulyatyeva, Bloomberg Economics
And not all of the plans unveiled have involved simple raises.
Aircraft manufacturer Boeing Co. unveiled a $300 million investment package after the bill’s passage that is split between improving infrastructure, training and charitable giving. While the first two are clear ways to get the most out of existing labor, the last isn’t.
AT&T is giving one-time $1,000 bonuses to 200,000 workers rather than raises. That may help improve morale among existing workers and lessen turnover, but it’s probably poorly-targeted to attract new ones.
“It is a response to the tax passage, but also the rhetoric around the tax package,” said John Silvia, chief economist at Wells Fargo in Charlotte, North Carolina. Democrats had blasted the package for being a big win for corporations and the rich, at the expense of the working-class. “They’re illustrating -- no, it’s not all going to buybacks, it’s going to pay workers as well.”
©2017 Bloomberg L.P.