Corporate America has one last way to keep wages down: terms and conditions.
In a note to clients on Monday, analysts at Wrightson-ICAP examined the outlook for wage inflation.
In short, the firm expects that wage growth could continue to creep upwards but doesn’t expect it to really take off to show something like 4% year-over-year growth in the near future even as the labour market continues to tighten.
As of November, wages were growing at an annual pace of 2.3%.
But given the flattening of worker quits in 2015, Wrightson thinks employers can still offer prospective employees what they call better “terms and conditions” — which include things like flexibility on hours and working from home — in exchange for more leverage on wages.
Here’s Wrightson (emphasis ours):
Fed officials frequently express the hope that an improving job market will persuade some of those missing workers to return to the labour force. We would put it the other way around. If wage growth accelerates, employers will work harder to lure those workers back into the labour force. One of the hallmarks of a strong U.S. labour market in the U.S. in recent expansions has been increased employer flexibility with respect to working conditions. High unemployment in recent years has meant that firms have generally had to make fewer concessions to workers who need nonstandard hours or who prefer to telecommute. When faced with the choice between offering more flexibility or higher wages to attract new workers, employers tend to become more willing to bend with respect to “terms and conditions.”
We don’t know exactly when this “recruitment effect” will start to become visible in the data. As noted above, turnover rates have not picked up, which suggests that the corporate sector is not yet under pressure to find more creative ways to attract new workers. The key point is this, though: the history of the past couple of expansions strongly suggests that employers will start to find ways to reabsorb marginalized workers long before wage growth accelerates to levels that would pose a significant upside threat to the Fed’s inflation target.
Flattish wages have been seen as the final hurdle standing between an improving labour market and one that has surpassed the “full employment” threshold.
Additionally, without a marked pick-up in wages many have argued the Federal Reserve will be hard-pressed to see inflation meaningfully exceed its 2% target (currently inflation in lagging well below this with the Fed’s preferred reading coming in at 1.3% in November).
So while the leverage employers have over employees may be diminishing, wages aren’t yet at the point where the balance of power really tips. And even when it does, there will still be a lag before workers start to see big pay increases as the primary way for employers to entice them.
But it seems that once “terms and conditions” aren’t enough to keep workers from bouncing from job to job, companies will have no choice but to simply pay better.
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