Tags: Wage | Growth | Riddle | Financial

Angling to Solve the Wage-Growth Riddle, Financial Campers Come Up Empty

Thursday, 07 Aug 2014 05:22 PM

Federal Reserve chief Janet Yellen is worried U.S. workers aren't seeing wage gains as the world's largest economy gathers steam. But if a debate among financiers during a recent fishing trip in Maine is any sign, she hasn't quite won over the business world to her view.

At this year's Camp Kotok — an annual gathering of boldface names in finance, helmed by Cumberland Advisors' David Kotok — the issue took center stage during an evening debate at Leen's Lodge, a collection of log cabins set on the placid shores of West Grand Lake. Facts flew, but consensus was elusive.

The debate was more than just academic: The answer to the wage inflation puzzle could hold the key to when the Yellen Fed agrees the time is right to raise interest rates from near zero, where they've been stuck for nearly six years.

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That, in turn, will affect assets of every stripe — stocks, bonds, the level of the dollar — the daily bread and butter for the Kotok campers when they leave Maine's north woods for their offices back in New York, Chicago, Los Angeles and elsewhere.

On Saturday night in the lodge dining room, surrounded by knotty pine and photos and mementos of hunting and fishing trips past, David Rosenberg, chief economist at Gluskin Sheff, and Philippa Dunne, of the Liscio Report research group, squared off. The debate was low-key, even if the stakes were high.

Rosenberg argued that wage inflation is such a lagging indicator that it would behoove the Fed to move earlier. The labor data, he added, move "glacially."

Dunne countered that because workers have seen their share of the economy slip for decades, there is a place for wage inflation. It is at least somewhat desirable, she said.

That response underscored one difficulty in deciding whether wages are or even should be higher before the Fed acts: the wide range of lenses through which to view the question.

Nor do the data always help, some campers noted. Two different data sets released by the Labor Department in the days before Camp Kotok convened illustrate the difficulty.

According to the Employment Cost Index, wages rose in the second quarter by the fastest rate in more than five years. But the monthly nonfarm payrolls report showed average hourly earnings in July were unchanged, after nominal increases in the previous two months.

Harvey Rosenblum, a professor at Southern Methodist University and former director of research at the Federal Reserve Bank of Dallas, said the national reports aren't showing the extent of inflationary pressure.

In Texas, Rosenblum pointed out, the employment market is on solid ground. The June unemployment rate there was 5.1 percent — a full point below the national rate that month.

"Looking at national data masks the emerging problems," he said.

For the people of Grand Lake Stream, though, the presence or absence of wage inflation isn't about global finance — it's about daily life. Washington County is the poorest in Maine, with median household income of around $36,500.

At night, the lack of streetlights means the stars are brighter than in Manhattan or Boston or any of the other cities from which the campers come.

The guides who take the campers out onto the many lakes each day know plenty about the smallmouth bass and perch and even salmon that inhabit these waters. What they don't know is how to keep their wages apace with costs.

The official minimum rate, voted on by the guides' association, rose to $250 per day from $240 this year, or 4 percent higher, said Steve Schaefer, a registered Maine guide.

"It had been many years since an increase," said Schaefer, an affable man who takes more pleasure in seeing visitors land fish than in hooking his own.

"I think the official rate will be stuck at $250 for some time," he added.

Schaefer may be right. The federal minimum wage, for example, hasn't budged from $7.25 per hour since 2009.

And that is emblematic of a concern that keeps at least one of the Kotok campers up at night.

"We have what I call a barista economy, a low-wage service-oriented economy, and then an economy driven by people that have investable assets," said Madeline Schnapp, director of economic research for PropertyRadar. "They haven't been affected as much by this downturn, whereas the barista economy has, and their purchasing power has been depleted by food inflation, oil inflation and the like."

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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