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Workers Finally Get Theirs


News: Analysis & Commentary: THE ECONOMY

WORKERS FINALLY GET THEIRS

Is the great wage drought finally over? All through 1994 and early 1995, corporate profits skyrocketed, with companies reporting quarter after quarter of record earnings. Unemployment fell to levels not seen since the late 1980s, as companies hired new hands. Yet with wages barely rising, many workers still found themselves losing out to inflation. The slogan for the recovery could have been: "Where's the beef?" Plenty of the nation's workforce griped that they could barely afford macaroni and cheese.

Now, relatively late in this recovery, America's workers, though not exactly flush with cash, may find themselves with a little spare change. There is hard evidence that a combination of rising productivity, falling prices, and tight labor markets is at last nudging real wages upward. According to a calculation by BUSINESS WEEK, 70% of full-time workers are in occupations that have seen real pay increases over the past year, compared with only 14% in 1994 (chart). Average hourly earnings, adjusted for inflation, rose at a 1.0% rate during the past six months, with increases stretching across virtually every sector of the economy. From high tech to retailing to finance, wage gains now are outpacing inflation.

To be sure, real wages still have not climbed back to where they were in 1989, before the recession started. But that may just be a matter of time if higher productivity continues to push up wages. "There is now a very gradual pressure on compensation," says Alan R. Schonberg, president of Management Recruiters International, a Cleveland recruiting firm with offices nationwide. "It's just beginning to manifest itself."

What has changed in recent months to propel wages higher? The unemployment rate is now just 5.5%, well below the level where wages historically have begun to accelerate (page 38). But unemployment was low in 1994 as well. The big difference: Productivity growth is surging. Nonfarm productivity has risen 3.4% this year, far ahead of the 1.9% gain in 1994. (The statistics will be revised in December, but the new numbers also will show accelerating productivity growth.) And rising productivity means companies can pay higher wages without having to boost prices.

MULTIPLE OFFERS. Even workers who aren't experiencing higher take-home pay are benefiting from lower prices. During the past year, retail prices for nonauto goods have fallen by 0.4%, the first year-over-year decrease since 1986. That may not be encouraging for cash-starved retailers (page 84), but it's good news for consumers: It boosts buying power, even if wage increases are weak.

In high tech, a wage boom is in full swing. "A couple of years ago we didn't have much competition" for workers, says Kenneth Coleman, senior vice-president for administration at computer workstation maker Silicon Graphics Inc. "Today when you're recruiting someone, they have three or four offers." Trilogy Development Group, a privately held software company in Austin, Tex., has boosted base salaries by almost 15% over the past year to attract the kinds of technical and marketing people the company needs. "The competition out there is insane," says John D. Price, vice-president for marketing.

At SABRE Decision Technologies, a unit of AMR Corp., salaries overall have risen about 6% to 7% this year. The unit, which provides consulting and software to American Airlines Inc. and other companies, has hired 800 people this year and expects a similar increase next year. "We're often having somebody come into my office and say, `We really love working here, but I have this offer for a 40% raise or a 60% raise. Can you do anything about it?"' says Thomas M. Cook, president of SDT. "I don't see a softening in the marketplace."

That's true even for freelancers, if they have the right kinds of technical skills. During the past year, wages have risen by almost 9%--far more than inflation--at MacTemps, a Cambridge (Mass.) temporary-help company that places many desktop-publishing professionals.

Even less skilled workers are seeing higher pay. Not too long ago, Marcus Corp., a $278 million franchise operator of KFC restaurants, owner of movie theaters, and owner and franchiser of Budgetel Inn motels, could pay minimum wage to many of its entry-level employees. "Now there's very little minimum wage left in our operations," says Stephen H. Marcus, chairman and chief executive officer. Over the past six months alone, wages have gone up about 4% to 5%, notes Marcus.

Labor markets are tightest in the Midwest, where the unemployment rate is only 4.3%. Principal Financial Group, a big Des Moines-based insurer, has boosted salaries 6% to 7% over the past year to find entry-level computer programmers. Yet wages are rising all over the country. In the Phoenix area, hourly wages for retail sales positions rose by 11% during the past year. "We have huge pressure on the lower-level positions," says Sybil Goldberg, president of Spectra International, a human-resources firm in Scottsdale, Ariz. Even in the sluggish New York region, the pool of qualified applicants for accounting and secretarial jobs has tightened in 1995.

The entertainment boom is helping raise pay in California and Florida. In the Hollywood movie industry, hourly earnings are up by 15% over the past year. And a shortage of qualified applicants is helping push up salaries for entry-level supervisors at Universal Studios Florida, the Orlando theme park.

There are some areas of the economy where wages are still lagging. Real compensation in manufacturing fell last year in the face of global competition and continued job cuts. On Nov. 14, for example, 3M announced that it would cut 3,000 U.S. jobs as part of an effort to reduce costs. And ongoing cuts in military spending are holding down wages in regions such as Southern California and New England that were dependent on defense jobs. "We're still flooded with applications from people coming out of the defense industry here," says Gene Banucci, CEO of Advanced Technology Materials Inc., a Danbury (Conn.) developer of diamond-based semiconductors.

BONUS STRATEGY. Is this leading to higher inflation? Not so far. Productivity is still rising faster than wages. What's more, benefit costs are increasing at only 2.2% annually, their slowest rate on record, as companies get a handle on medical costs. This provides room to pay higher wages without triggering inflation.

Companies are also trying hard to keep their wage costs under control. One way is to pay bonuses, rather than raise base pay. In 1995, bonuses and other incentive pay rose by a third for nonunion hourly workers, according to a recent survey by compensation consultants Hewitt Associates. Managers and professionals received similar gains. If times turn bad, companies can more easily cut bonuses.

Moreover, workers are looking for stability and good opportunities as well as higher wages. "If you just play the salary game, you lose," says Coleman of Silicon Graphics. "Ultimately you have to capture the hearts and minds of people." True--but a nice increase in wages doesn't hurt.By Michael J. Mandel in New York, with Wendy Zellner in Dallas, Richard A. Melcher in Chicago, and bureau reports


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