In many ways this is the best economic data since the beginning of the recession. The Labor Department reports that unit labor costs have risen above the level of inflation for the first time since the end of 2008. And much of that can be attributed to higher wages, according to the Wall Street Journal.
Labor also revised up unit labor costs. For just the fourth quarter, unit costs grew at an annual rate of 2.8%, more than double the 1.2% reported a month ago. The large upward refiguring of unit labor costs, now rising at the fastest pace since late 2008, came from an upward revision to compensation.
The data highlight a challenge in the outlook: Adding new [usually less experienced] workers tends to lower overall productivity and raise unit labor costs. Left unchecked, rising unit costs will push up inflation pressures and cut into profit margins, creating headaches for the Federal Reserve and U.S. companies alike.
This being a WSJ article, the problems of the Federal Reserve and corporations are highlighted. The worker benefits from higher compensation which is coming about from a variety of factors. The improving labor market gives workers more bargaining power to ask for salary increases. And it puts more money in their pockets, which they have a high propensity to spend, increasing consumer spending. This is the start of creating a virtuous circle. Higher labor costs could chill more job hiring, but if there’s money to be made off of more consumer spending, companies will eat the labor costs and still turn a profit.
There are also signs that consumer credit has expanded, and if that means overleveraging, it’s probably a bad sign. But if it means that consumers have more confidence that they can handle their debts because of increased job opportunity and higher wages, that could be a good sign.
Corporations made money during the recession by squeezing as much productivity as possible out of workers. Productivity growth has now slowed, which means that profits may drop, but also that workers will have to be hired to meet rising demand. That’s a good economic story, despite the few less coins in the pockets of corporate executives.
The Bureau of Labor Statistics will release the jobs numbers for February tomorrow morning.