How Increasing Wages Are Affecting Our Economy

It’s February, so some of the year-end economic metrics for 2021 are starting to be reported, and it is no surprise to see that wages took a big jump last year. Wage increases were fueled by the unexpected supply chain morass that the Covid-19 lockdown precipitated, and were further compounded by the amount of stimulus cash that was injected into our economy. The result is a difficult reality for concrete producers: wages are going up, and at the fastest pace since 2001.

The Labor Department reported that employers spent 4 percent more on wages and benefits last year as workers received larger pay raises in a complex labor market reflected by tight employment, a rebounding economy, and a period of accelerating inflation. But the figures did offer a sign that labor-cost increases could be easing, with a seasonally adjusted 1 percent rise in compensation for the fourth quarter, down from with a 1.2 percent increase the previous three months.

Separate economic figures showed that the Federal Reserve’s preferred measure of inflation, the “core personal-consumption expenditures price index,” accelerated to 4.9 percent in December 2021 over the prior year. And household spending fell 0.6 percent in the same period as consumers pulled back on shopping for goods during the last month of the holiday season.

Rising pay and benefits are putting more money in workers’ pockets, but in a throwback to the Nixon-era round of high inflation, it is not enough to keep pace with rising prices. Inflation recently hit its fastest pace in nearly four decades amid supply and demand imbalances for both goods and labor related to the Covid-19 pandemic.

Economists explain there are numerous factors contributing to high inflation during the pandemic, most notably an overwhelmed supply chain. As a result, inflation has fundamentally accelerated, and it’s fair to say that price gains are feeding back into wage gains as well. Investors and Federal Reserve policy makers now consider the labor market to be at, or near, full employment, despite the fact that the economy has only recovered about 84 percent of the jobs it had before the pandemic. The labor force has shrunk, and with the unemployment rate now below 4 percent, the Fed is shifting gears from providing stimulus to the economy to fighting inflation while trying to maintain the labor-market recovery.

After signaling that the Fed would begin steadily raising interest rates in March, Chairman Powell believes that price increases have been primarily tied to the dislocations caused by the pandemic. But he also believes that without more workers returning to the labor market leading to faster growth, higher wages could continue push prices up.

On the spending front, households increased outlays on services in December, primarily due to increased spending on healthcare as Omicron spread. But spending on goods fell amid supply-chain bottlenecks and consumers starting their holiday shopping earlier.

As has been widely reported in the popular business press, McDonald’s is a poster child for the current wage increase/inflation phenomenon that has gripped our economy. The fast-food company has had to raise menu prices to keep pace with rapidly growing costs, with wages up more than 10 percent at its U.S. restaurants. McDonald’s executives have estimated that U.S. menu prices increased about 6 percent last year on an annual basis, because of increasing costs for labor, food, packaging, and other materials. The company reported a 7.5 percent increase in U.S. same-store sales for its fourth quarter, with the chain attributing the growth to menu price increases and promotions.

Like the example of what McDonald’s is facing, this combination of inflation and rising prices is forcing changes on concrete producers, and as a firm, we anecdotally see an increase in wages across all hourly employment, combined with upward pressure on average selling prices for materials. The challenge for our industry is to find a way to pass along the wage increases as quickly as they are implemented to avoid impacting margins and the corresponding shrinkage in profitability.

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.