By now most market participants have been able to see through the smoke and mirrors of Friday’s ‘explosive’ wage growth data (driven by a drop in hours worked and declined on a weekly basis) but the narrative remains one of soaring wage growth and inflation anxiety on mainstream media today.
Perhaps that is why Goldman Sachs penned a rather fascinating report over the weekend that played down wage growth stories dramatically and – most surprisingly – pointed the squid-finger at the ever-increasing concentration of American business as the reason why… in other words, enabling oligopolistic (or monopolistic) economies across various sectors has crushed the American Dream for many – and will continue.
Goldman’s Jan Hatzius notes that the wage data released last week provided positive early indicators of a potential reacceleration of wages, which disappointed in 2017, but a strong of recent data misses in the various wage series – including the Atlanta Fed wage tracker and median weekly wages series from the household survey – have pushed down our broader wage growth tracker to just 2.1% as of Q4, as shown below.
More broadly, the moderate pace of wage growth over the last couple of years has fallen short of the expectations of many observers.
While the labor share – the part of national income paid to workers—has recently continued its decades-long decline, US corporate profit margins have risen further to historic highs, especially for the most profitable firms. Over the last two decades, most industries have also become more concentrated with a few large firms earning a larger share of revenue, potentially shifting the bargaining power from consumers and workers to firms and employers.
As the chart above shows, average wage growth has fallen from 3.5% in 1985-2007 to 2.1% in 2008-2017. While much of the weakness in wage growth over the last decade relative to pre-crisis norms can be attributed to cyclical labor market slack and soft price inflation, longer-run declines in trend productivity growth and in the trend labor share are currently still weighing on wage growth.
Exhibit 2 shows that the part of nonfarm business income paid to workers has fallen by 6 percentage points (pp) since 1999 to just 56%, while corporate profit margins have continued to rise.
Goldman suggests that rising concentration of employment could shift the balance of bargaining power from workers to employers. Wage-setting power allows employers to lower wages below workers’ marginal revenue product without losing too many employees. While a handful of superstar employers with better technologies could choose to hire more workers and pay higher wages than less productive firms, the limited availability of attractive alternative employers may prevent workers from earning their full marginal revenue product.
Exhibit 4 shows that the share of total industry sales attributed to the largest 50 firms has increased in 10 of the 13 two-digit industries covered by the Economic Census.
About 75% of the NAICS three-digit industries have experienced an increase in concentration levels over the last two decades. We have documented in previous research the relationship between concentration and profit margins, as illustrated in the right panel of Exhibit 4.
And as Goldman concludes,
Combining the average decline in the number of establishments in 2001-2016 and our coefficient estimates, we estimate that the rise in labor market concentration accounts for a 1% hit to the level of wages since 2001, or a 0.05-0.1pp drag to annual wage growth. A crude sum of our product and labor market concentration estimates suggests a combined drag from the rise in concentration to annual trend wage growth of around 0.25pp.
Which roughly translated means America’s increasingly monopolistic corporatocracy has weighed heavily on Average Joe’s wages…
And Goldman is not entirely optimistic this improves anytime soon…While the cyclical outlook for wage growth looks increasingly favorable given the ongoing fall in labor market slack, a continued decline in the trend labor share would hold down trend wage growth…we remain cyclically optimistic about wage growth and continue to expect a renewed acceleration as the labor market tightens further. Over a longer horizon, our analysis shows that the potential of continued rise in concentration implies some downside risk to our 3-3.25% trend wage growth estimate.
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