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Higher Wages Come At A Cost

0711_Wages

Image source: Unsplash.com

What's going on?

Jobs and wages in America are both on the up, but higher pay packets are beginning to chomp into companies’ bottom lines.

What does this mean?

More jobs means less unemployment, which is good for workers as they’re hot property. This, in turn, means companies have to offer more money to steal them from their current jobs. However, what’s good news for workers is bad news for companies right now: they have to shell out extra dollars for staff, but they’re struggling to raise their prices (more below) to cover the cost. Without more cash coming in, wage increases are coming straight out of companies’ profits.

Why should I care?

For markets: Industrials are getting squeezed on both ends.

In the industrials sector – which includes machinery, construction and aerospace (and Nine Inch Nails) – labor costs are 21% of companies’ revenue, on average. If wages rise more and prices don’t increase, that number will go up – which means less profit for those companies. The sector’s facing a double whammy since it’s also being hit hard by trade tensions and tariffs – contributing to the rising cost of some of the goods needed to make their products, like steel and aluminum.



The bigger picture: It’s a workers’ market.

In June, average hourly wages in the US increased by 2.7% from the same time last year, which was pretty much on a par with inflation (the rate at which the price of goods rises – consider what a movie ticket costs now compared to ten years ago) at 2.8%. This means workers aren’t actually getting more bang for their buck from their higher wages – so they don’t necessarily have more spare cash to cope with price increases. The result: companies have been reluctant to raise prices, fearing lost sales – potentially to Amazon. Some businesses are already struggling to find workers, and some workers are taking advantage of the situation, job-hopping in search of higher wages.

Originally posted as part of the Finimize daily email.

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