Margin pressures from surging labor costs for the first time in at least two decades.
By Wolf Richter for WOLF STREET.
Companies are now announcing this on a daily basis: They’re raising wages, and by a lot. Some companies are raising wages in reaction to the threat of unionization. And unions have been emboldened by the labor shortages.
Labor costs – which for many companies are over 50% of their total costs – are rising, and will rise further going forward because the wage increases are just now starting, and labor costs will pressure their margins for the first time in maybe decades.
The whole power balance has changed: There is blistering demand – thanks to all the monetary and fiscal stimulus – but not enough labor because workers have gotten choosier, and a few million have left the labor force to go retire on their gains in the stock market, housing, cryptos, or whatever, thank you hallelujah Fed. And others cannot work or don’t yet feel like working, etc. Myriad reasons. But it changed the dynamics and pricing of labor.
Starbucks was one of the big names with relatively low-wage service workers that came out with an announcement of “unprecedented investments in wages” – because calling it an “investment” sounds a lot better to investors and algos than calling it an “expense,” which is what wages are from an accounting point of view.
In January, Starbucks will give a raise of 5% to folks with two or more years of service and a raise of up to 10% for folks with five or more years of service. Next summer, it will raise its minimum wage to at least $15 per hour, and the “average pay” for all its US hourly employees “will be nearly $17/hr.” Baristas will earn, depending on market and tenure, from $15 to $23 per hour, it said. We’ll find out if this will attract enough workers. In lots of places, the local minimum wage is already over $15.
This will raise its costs of wages and benefits in just the US by $1 billion, Starbucks said. And some of these wage movements have started to show up in the data.
Wages across all private industries (government entities excluded) jumped by 1.6% in the third quarter from the second quarter, the largest jump in the data going back to 2002, according to the Employment Cost Index, released today by the Bureau of Labor Statistics. This amounts to wage gain of 6.4% annualized.
This data is based on surveys of about 23,000 business locations from 5,900 private sector employers, tracking changes of wages paid by industry. Unlike other wage data, such as average hourly wages, the Employment Cost Index is not impacted by people switching from lower-paying industries or occupations to higher paying ones since each data set reflects the wage movements within each industry, and not the income of the workers, who might be making more money by switching industries.
Wages made big gains across all industries.
Below are some sample industries that span the spectrum on the wage scale: At the upper end, banking; and at the lower end, accommodation and food services, and retail trade.
Upper end: at banks, salary gains were stunning. At these fine institutions of “credit intermediation and related activities,” some of which are desperately trying to get their people to go back to the office, wages exploded by 7.7% in Q3 from Q2, after having already jumped by 3.6% in Q2 from Q1. Compared to Q3 2020, wages spiked by 12.2%, by far the fastest increase in the data going back to 2004.
Goldman Sachs is in this category. In August, sources told the Wall Street Journal that the base pay for its entry-level first-year analysts in its investment banking division would jump by 29% to $110,000. For its second-year analysts, salaries would jump by 31% to $125,000. For first-year associates, salaries would jump by 20%, to $150,000.
A few weeks later, it emerged that Goldman also is boosting salaries on the same scale for its junior staff in its sales, trading, research, and asset management divisions.
JPMorgan Chase, Bank of America, and other banks have already increased pay for their junior staff not only in their investment banking division, but also in sales, trading, and research.
At the lower end: Accommodation and food services saw big quarter-to-quarter increases in Q1 (+1.7%), Q2 (+2.9%) and Q3, with another gain of 2.6%. Year-over-year, wages shot up 8%, the fastest increase in the data going back to 2004. And compared to Q3 2019, wages shot up by 13.5%. Starbucks is into this category:
At the lower end: in the Retail trade, wages increased by over 1% quarter-to-quarter in each of the past four quarters, including in Q3 with an increase of 1.6% from Q2. Year-over-year, wages jumped by 5.9%, by far the highest in the data.
Note: These are employees working at retail stores, and do not include warehouse workers at Amazon or tech workers at Amazon or truck drivers at Walmart. Those are in their own categories:
While all industries booked wage gains, not all gains were this hefty.
Manufacturing saw modest wage gains until Q2, when wages suddenly rose by 1.3% from the prior quarter, and then in Q3, they rose another 1.2%, for a year-over-year gain of 3.8%. While that sounds like a more modest gain, it was nevertheless the highest in the data going back to 2002.
This industry is struggling mightily with shortages of parts and materials, particularly semiconductors that now go into so many products, and production in the huge auto industry has plunged. This may be keeping hiring pressures lower for now than in other industries.
Governments are slower-moving.
State and local government entities did not increase wages overall in the same manner as the private sector. Governments are slower moving. Things take a while. Overall, state and local governments raised wages by 2.4% year-over-year:
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