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Growing Wage Pressure from Lower-Paying Jobs

"Rising wages are a double-edged sword for the U.S. economy, as we outlined earlier this year. On the positive side, higher wages can help boost consumption which tends to be the primary driver of U.S. economic activity. Rising compensation can also bolster savings, and the consumer is now saving 8.3% of their disposable income, up nearly four times from the 2005 low. While higher savings has contributed to slower economic growth, it has helped strengthen consumer balance sheets which should allow for greater spending in the event of a sustained slowdown.


The downside to stronger wage growth is the potential to hurt corporate profitability, as wages are one of the largest expenses for most businesses and those in the services sector particularly.


...While higher wages are often a short-term benefit, over time they have the capability to do harm.


Corporate profits typically get squeezed the most when wage increases outpace productivity gains. This is currently the case, as over the past five years overall wage growth has averaged 2.7%, well ahead of the 1.0% average increase for labor productivity (output per hour). 


... The Wage Growth indicator is one of the longer leading indicators on the ClearBridge Recession Risk Dashboard. As a result, this [negative] change does not signal a material shift in the near-term."


(Recession Indicators Update: Wage Pressures Mounting dated 12/2/2019 by Jeffrey Schulze, Director & Investment Strategist, and Josh Jamner, CFA & Investment Strategy Analyst with ClearBridge Investments)


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