US Workers Can Expect Fatter Checks

It's been a long time coming, but American workers are about to get a raise.

A tightening labor market and a new law are forcing employers to hand out fatter paychecks. These pay raises will probably cut into corporate profits and unsettle the nation's inflation-leery central bankers. But they will also prove to be a boon to many workers who, for five years, have seen their companies flourish but their wages lag behind inflation.

"It's fitting," says Paul Kasriel, chief US economist for Northern Trust Company, based in Chicago. "Right after Labor Day, it's labor's day.... We're starting to see wages move up rapidly."

The latest evidence came Friday, when the Labor Department released figures showing the lowest unemployment rate in seven years. The seasonally adjusted rate for August stood at 5.1 percent, a big decline from July's 5.4 percent and the lowest level seen since March 1989. Just as striking: Average hourly earnings in the past three months have grown at an annualized rate of 4.9 percent; for manufacturing workers, they're up 7.5 percent. Last year, hourly earnings rose 2.3 percent.

American workers "are set for a catch-up - not outlandish increases or dramatic increases, but some form of catch-up in wages," says Arnold Moskowitz, chairman of Moskowitz Capital Consulting Inc., with offices in New York and Palm Beach, Fla.

The surge is occurring across the board. Here in Pittsburgh, for example, Local 12 of the Bakery Confectionary and Tobacco Workers union got a new contract from Nabisco raising wages $2.60 an hour over five years. "That's a tremendous contract," says Samuel Papa, former president of the local union. In the early 1980s, the Pittsburgh plant was slated to close.

Low-paid workers should also see a rise in pay, since the federal minimum hourly wage is slated to rise 50 cents starting next month. Late next year, the minimum wage will rise another 40 cents.

Inside the August numbers

The August figures, especially the big decrease in the unemployment rate, are less spectacular than it might seem, economists warn. The figures were boosted by the return of some 50,000 teachers to work, says David Wyss, research director at DRI/McGraw-Hill, an economic research firm in Lexington, Mass. The wage increases are also less dramatic than at first glance, he adds, because of recent slowing in spiraling health-care costs. Smaller jumps in the costs of health-care and other fringe benefits are allowing employers to give workers more compensation in the form of wages.

"There is less to the unemployment numbers than meets the eye," said Jerry Jasinowski, president of the National Association of Manufacturers, in a statement released Friday. "The economy continues its relatively slow, steady growth and is in no danger of overheating." Wall Street seemed to echo that sentiment. Spooked on the day before the release of the unemployment figures, the Dow Jones industrial average rebounded nearly 53 points on Friday; the bellwether 30-year US Treasury bond, usually averse to any hint of inflation, actually gained half a point.

Fed likely to bring out 'stick'

The nation's central bankers are not likely to be as sanguine, however. Economists say the August unemployment figures are only the latest indicator that inflationary pressures are building. "This economy is growing faster than we thought," says Mr. Wyss of DRI/McGraw-Hill. "Maybe it's time to bring out the stick again."

The "stick" in this case is rising interest rates, which would slow growth and keep inflation under control. Economists say the Federal Reserve is already primed to raise rates and that the unemployment report makes it likely it will act sooner rather than later. The question is: How much sooner?

Mr. Kasriel of Northern Trust thinks a rate rise will come Sept. 24, when the Fed is scheduled to hold its next policy meeting. "The Fed's credibility is now going to be tested," he says. "If they don't move now to try to moderate these inflationary pressures that are building, they could have a real major rise in long-term interest rates."

Mr. Moskowitz believes the Fed will wait to act until after the election. By the end of January, however, both analysts predict the Fed will have raised interest rates by at least half a percentage point. That is likely to make it harder for wages to go up at the rate they have during the past three months, economists say.

Still, higher interest rates should keep inflation from nibbling away at the bigger paychecks that American workers have finally begun to see.