fun with numbers - wage "inflation"?

[jk]

by floyd norris, ny times

September 7, 2006, 12:01 pm Inflation Sign? Don’t Bet on It.


There was much concern on Wednesday over a report showing that unit labor costs surged in the first quarter.

But there should not have been. It was not wages that were going up. It was the stock market.

Robert Barbera, the chief economist of ITG, points out that the driving force in that change was a revision in the figure for growth in wage and salary income. And while you may think wage and salary income is just that — the money you get directly from your employer — the government also includes the profits people make from cashing in stock options.

“It almost certainly was a consequence of an explosive exercise of options,” Mr. Barbera said.

When the government first estimated the first quarter figure for growth in wage and salary income, it came up with an annual rate of 7 percent. That was reasonable based on the data it had, which come from the monthly employment numbers. But since then it has gotten real data, which led to the increase.

The stock market struggled late last year, and then rose nicely early this year. What this almost certainly means is that a lot of people cashed in their stock options. That is good for them, but it is not a sign of inflation.
Mr. Barbera says he expects that the pace of options exercises slowed down in the second quarter, and that the annual rate of growth in wage and salary income for that quarter will be cut back from the first estimate of more than 7 percent to just 1 or 2 percent. If so, in three months we’ll hear that unit labor costs have settled down.

He points to the first quarter of 2000, when wage and salary income grew at a rate of 15 percent, but then fell to 2 percent in the second quarter. Then, as now, it was the options.

The problem with this number is not that it is wrong; it is that the Federal Reserve may pay attention to it and think that it needs to tighten again. The economy is slowing, and higher rates are not what it needs.


jk comment - should have known better than to think the hoi polloi were getting a bigger piece of the pie. and so wage data is no longer inconsistant with a deflationary lurch.

[blazespinnaker]

Re: fun with numbers - wage "inflation"?

I don't think anyone is going to complain about wage inflation, especially given the profit levels that a lot of corporations are at right now.

I think the concern is that the corps continue to profit. The fed wants to see some more warns there, and if they don't, they may have to hike or at least not slash if a recession looms.

We're supposed to be in a global marketplace and corporations should not have pricing power .. if they starting showing that they do, then this is will freak the fed out as they will suspect increased inflation expectations..

[bart]

Re: fun with numbers - wage "inflation"?

Hourly earnings are not exactly roaring ahead:

[Finster]

Re: fun with numbers - wage "inflation"?

Hourly earnings are not exactly roaring ahead:

...

But that doesn't include that not-so-hourly compensation that JK cites; viz. "Robert Barbera, the chief economist of ITG, points out that the driving force in that change was a revision in the figure for growth in wage and salary income. And while you may think wage and salary income is just that — the money you get directly from your employer — the government also includes the profits people make from cashing in stock options." does it?

In fact that is labor compensation, too. Corporate execs are labor - just very overpriced labor - that have a disproprationate role in setting their own pay. But if you want to look at overall labor compensation, you have to count it.

[bart]

Re: fun with numbers - wage "inflation"?

But that doesn't include that not-so-hourly compensation that JK cites; viz. "Robert Barbera, the chief economist of ITG, points out that the driving force in that change was a revision in the figure for growth in wage and salary income. And while you may think wage and salary income is just that — the money you get directly from your employer — the government also includes the profits people make from cashing in stock options." does it?

In fact that is labor compensation, too. Corporate execs are labor - just very overpriced labor - that have a disproprationate role in setting their own pay. But if you want to look at overall labor compensation, you have to count it.

Truth, and I have as yet to have found the time to find non hourly salary data... the round tuits keep getting back ordered. And I don't know about that stock option item, it sure is intriguing.

Mostly I just posted it as mild ridicule to the concept that we have wage pressures and wage inflation (except at the high end), and agree with the basic points jk made.

It just sounds like more stats fiddling - wish I was sure of the full picture though.

[Finster]

Re: fun with numbers - wage "inflation"?

Truth, and I have as yet to have found the time to find non hourly salary data... the round tuits keep getting back ordered. And I don't know about that stock option item, it sure is intriguing.

Mostly I just posted it as mild ridicule to the concept that we have wage pressures and wage inflation (except at the high end), and agree with the basic points jk made.

It just sounds like more stats fiddling - wish I was sure of the full picture though.

Not trying to fin you here ... (no matter how much you may deserve it ... ;-) . I think JK raises an important point. Typically it's the "capitalists" being made out to be profiting at the expense of workers. But the capitalists are the owners of the stock - which these days are much the working class, through 401(k)s, pension plans, IRAs, and whatnot.

The folks who are really getting rich are the ones at the top of the labor heap - corporate managements. They have undue control and influence over the corporate boards - the ones that are supposed to be representing the shareholders. The fox is guarding the henhouse, and the corporate malfeasance revealed over the past few years and the more recent stock options backdating scandals are the sorry result.

[bart]

Re: fun with numbers - wage "inflation"?

Not trying to fin you here ... (no matter how much you may deserve it ... ;-) . I think JK raises an important point. Typically it's the "capitalists" being made out to be profiting at the expense of workers. But the capitalists are the owners of the stock - which these days are much the working class, through 401(k)s, pension plans, IRAs, and whatnot.

The folks who are really getting rich are the ones at the top of the labor heap - corporate managements. They have undue control and influence over the corporate boards - the ones that are supposed to be representing the shareholders. The fox is guarding the henhouse, and the corporate malfeasance revealed over the past few years and the more recent stock options backdating scandals are the sorry result.

There has never been any question in my mind that I deserve finning, I've just learned to duck a tiny bit better ... and am still nursing the scars... ;)


Yes, your and jk's point is well taken about the "top of the pyramid" and the egregious gaps in income (and the failure to pay it forward too!) - I very much agree.

I've heard the last 5+ years that its the working class that owns much of the stock but have honestly never investigated how accurate that data is. And then there's the issue of marking some point where the "working class" ends and whatever is above it starts... yet another stickey wicket. Got any reliable data in either area?

[Finster]

Re: fun with numbers - wage "inflation"?

There has never been any question in my mind that I deserve finning, I've just learned to duck a tiny bit better ... and am still nursing the scars... ;)


Yes, your and jk's point is well taken about the "top of the pyramid" and the egregious gaps in income (and the failure to pay it forward too!) - I very much agree.

I've heard the last 5+ years that its the working class that owns much of the stock but have honestly never investigated how accurate that data is. And then there's the issue of marking some point where the "working class" ends and whatever is above it starts... yet another stickey wicket. Got any reliable data in either area?

I thought data was your bailiwick! ;)

But the exact figures probably don't matter much much anyway. All you really need do is consider the demise of the defined-benefit pension, and the rise of the IRA 401k, etc. Joe Sixpack owns way more stock than he used to. The old simplistic image of the rich capitalist and the poor worker isn't valid any more.

What we have now is the rich worker and the poor worker. The rich one gets that way because he doesn't even have to pay for his stock - he gets options! - courtesy of his cronies on the board. They ostensibly were supposed to align his interests with those of shareholders by making him a shareholder too, but the whole backdating scandal puts the lie to that. If the stock didn't go up enough to put the options way into the money, just find a "new" grant date that will do the trick.

[bart]

Re: fun with numbers - wage "inflation"?

I thought data was your bailiwick! ;)

But the exact figures probably don't matter much much anyway. All you really need do is consider the demise of the defined-benefit pension, and the rise of the IRA 401k, etc. Joe Sixpack owns way more stock than he used to. The old simplistic image of the rich capitalist and the poor worker isn't valid any more.

What we have now is the rich worker and the poor worker. The rich one gets that way because he doesn't even have to pay for his stock - he gets options! - courtesy of his cronies on the board. They ostensibly were supposed to align his interests with those of shareholders by making him a shareholder too, but the whole backdating scandal puts the lie to that. If the stock didn't go up enough to put the options way into the money, just find a "new" grant date that will do the trick.

And yet again I fall off my straw pedestal... ;)


True on the trends in pensions, etc. but I'm still very curious about the actual stock breakdowns by household income brackets since the early '80s. Maybe I'll run across something in the next few days...

Having owned and run a large photo lab for 15 years until I sold it in '91, I also have to say that some portion of the ridiculous salaries are actually justified.
The incredible amount of crud to go through with all the regulations and laws (SOX being the most recent one that doesn't exactly address the right problem and is almost worthless) and "general interference" just to produce products or services... well, they were one of the top three reasons that made me decide to sell the business.

[Finster]

Re: fun with numbers - wage "inflation"?

And yet again I fall off my straw pedestal... ;)


True on the trends in pensions, etc. but I'm still very curious about the actual stock breakdowns by household income brackets since the early '80s. Maybe I'll run across something in the next few days...

Having owned and run a large photo lab for 15 years until I sold it in '91, I also have to say that some portion of the ridiculous salaries are actually justified.
The incredible amount of crud to go through with all the regulations and laws (SOX being the most recent one that doesn't exactly address the right problem and is almost worthless) and "general interference" just to produce products or services... well, they were one of the top three reasons that made me decide to sell the business.

The core problem isn't the amount they make, it's the conflict of interest involved. The board that is the representative of the shareholders and the employer of the management is often hand-picked by the management.

No kidding on SarbOx. It to micro-manages internal processes, yet obviously already has failed to prevent abuses. All that was really needed is simple, clear accounting standards and prohibition of the types of conflict of interest just mentioned. Shareholders, not managements, should control boards, and the tax loopholes that spawned option compensation closed.

[jk]

Re: fun with numbers - wage "inflation"?

What we have now is the rich worker and the poor worker. The rich one gets that way because he doesn't even have to pay for his stock - he gets options! - courtesy of his cronies on the board. They ostensibly were supposed to align his interests with those of shareholders by making him a shareholder too, but the whole backdating scandal puts the lie to that. If the stock didn't go up enough to put the options way into the money, just find a "new" grant date that will do the trick.

all that stock options did was to give management a direct interest in manipulating the stock price in the short run. the only way for options to align the interests of management and owners would be for the managers to have to keep their stock a good, long time. the alternative is to view every stockowner as a speculator interested in day trading his positions.

[Finster]

Re: fun with numbers - wage "inflation"?

all that stock options did was to give management a direct interest in manipulating the stock price in the short run. the only way for options to align the interests of management and owners would be for the managers to have to keep their stock a good, long time. the alternative is to view every stockowner as a speculator interested in day trading his positions.

And that would be if they were used as advertised. With abuses like backdating, however, it's even worse; managment didn't even have to move the stock to profiteer on the options, just finagle the option terms.

I complete agree on the long term time frame. I advocate complete elimination of options in favor of restricted stock that is held in the grantee's name for a period of four years from the quarter in which it is granted, no ifs, ands, or buts. Stock granted in the first quarter of 2004, for example, would be released to the recipient in the first quarter of 2008. Regardless of whether the recipient is still with the company or not. This way, an action which merely gooses the stock price next quarter at the expense of the company's longer term well-being cannot be rewarded.

[bart]

Re: fun with numbers - wage "inflation"?

The core problem isn't the amount they make, it's the conflict of interest involved. The board that is the representative of the shareholders and the employer of the management is often hand-picked by the management.

True... and I consider mysefl well finned too.

[SeanO]

Re: fun with numbers - wage "inflation"?

I advocate complete elimination of options in favor of restricted stock that is held in the grantee's name for a period of four years from the quarter in which it is granted, no ifs, ands, or buts...This way, an action which merely gooses the stock price next quarter at the expense of the company's longer term well-being cannot be rewarded.

...maybe if you assume that they also can't otherwise hold stock, and that they aren't still there in four years when they do hold stock under your plan. As soon as either of those happens the incentives are back.

I've got a lot of issues with options as currently implemented, but I don't think restricted stock grants are the answer either. You really want a tool that allows workers who perform well to be able to participate in stock increases (a reflection of stockholders belief in future earnings), rather than just some bonus from current earnings. Well executed this should incent employees to be optimizing for the long term interests of the company.

[jk]

Re: fun with numbers - wage "inflation"?

...maybe if you assume that they also can't otherwise hold stock, and that they aren't still there in four years when they do hold stock under your plan. As soon as either of those happens the incentives are back.

I've got a lot of issues with options as currently implemented, but I don't think restricted stock grants are the answer either. You really want a tool that allows workers who perform well to be able to participate in stock increases (a reflection of stockholders belief in future earnings), rather than just some bonus from current earnings. Well executed this should incent employees to be optimizing for the long term interests of the company.

i like the concept of restricted stock, but what's to prevent someone from initiating an offsetting short position in a private account, or buying an option collar. policing this policy is very difficult.