Could Bigger Pay Raises (Yay!) Send Stocks Sliding (Booo!)?

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Throughout the economic recovery of the past five years, one area that hasn't seen as much improvement as expected has been worker pay. Yet even though one survey of major employers forecasts pay raises next year will continue growing more slowly than a decade ago, some finally believe that the long lull in labor cost increases could finally come to an end. If that happens, it could take away one of the key underpinnings of the bull market in stocks that has been running since 2009.

The 2014/2015 U.S. Compensation Planning Survey from the human resources consultants at Mercer found that most employers expect to keep their pay raises for 2015 in line with the recent past. After gains of just over 2 percent in 2009 and 2010 that corresponded to periods of extremely high unemployment, wages have increased at a higher rate. Nevertheless, employers have managed to keep increased labor costs within a tight range of 2.7 percent to 2.9 percent over the past four years, and Mercer expects that 2015 raises will come in at around 3 percent once again.

But not every worker can expect to see raises that size. Mercer found that the energy industry -- which has seen some of the largest growth in the domestic economy recently thanks to the boom in unconventional oil and gas exploration and production -- should see base pay rise 3.5 percent on average next year. By contrast, several other industries, including service providers outside the financial sector, will see subpar earnings growth.

Moreover, merit will determine a substantial portion of overall pay raises. Top-rated workers can expect to get raises of nearly 5 percent, while those among the lowest-rated in any particular company will be lucky to see pay levels stay flat, according to Mercer.

Getting Back to Normal?

Even with the slight upward trend in raises, growth in salaries still hasn't matched levels from 10 to 15 years ago when jobs were more plentiful and workers were in demand. As unemployment rates have fallen, though, companies have started getting the message that they'll have to pay their best workers more in order to retain their top talent.

If that happens, then it would be good news for struggling workers, who've had to endure tough financial conditions for a long time. Median household income fell for four straight years following the 2008 recession, and even after a modest recovery, it remains below levels from the early 2000s . With inflation running at 2 percent, a 3-percent pay hike won't fully close the gap, but it will keep median incomes moving in the right direction.

What's good news for workers could be bad news for investors, though.

A Catalyst for the Next Correction?

Historically, profit margins for U.S. corporations have run at around 6 percent, according to data from the U.S. Department of Commerce. Over the past several years, though, profit margins have climbed well above that level, ranging from roughly 8 percent to 10 percent.

Although a number of factors have kept profit margins high, low labor costs and higher worker productivity have played key roles in helping companies cut costs.

Many analysts have feared, though, that the trend toward lower labor costs was bound to reverse itself in time. Much of the focus of that fear has been on signs of inflation for raw materials used in manufacturing, but if labor costs climb back toward more typical historical levels, then they could put further pressure on corporate profits.

High profit margins have contributed greatly to rising earnings, which in turn have helped keep the stock market climbing. As the bull market ages, though, a pause in earnings growth could be the catalyst for a long-awaited correction in stocks. If pay raises do start to accelerate this year and in future years, then resulting higher labor costs could turn out to be the cause of the next stock-market downturn.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger. Some dividend-paying stocks that might well survive the next stock market downturn are in our latest free report.


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Iselin007

My ancestor left Normandy in 1066 on his way with William the Conqueror to England where his descendants left for New England in the early 1600's. Since that time the corporate elite have been trying to bring back feudalism and and syphon of the wealth of the working class.

August 14 2014 at 2:55 PM Report abuse rate up rate down Reply
1 reply to Iselin007's comment
drbobdez

Would that it were feudalism — "The serfs and their progeny were bound to the land they occupied and were bought and sold with it. As part of the land, they could not be put off of it nor were they subject to conscription. As chattel, their lives were not easy, but they were secure. They were afforded the protection of their lord; had sixty holidays and all Sundays free from their duties; were provided a feast by their lord at planting, harvest time, and principal holidays; and, they were supported by their lord when they were forced to retire as a result of old age or injury (Burns,1963; Tierney, 1974)."

August 14 2014 at 4:39 PM Report abuse -1 rate up rate down Reply
Iselin007

Raise the pay of the hourly workers and give the unemployed full time jobs or tax the bejesus out of these spoon fed monkeys!

August 14 2014 at 2:43 PM Report abuse -1 rate up rate down Reply
razov

The author of this article is repeating the same old, discredited "supply side" economics that began during the Reagan era.
If you look at what drives sales growth, and thus corporate earnings from the demand side, a large middle class with more disposable income will boost GDP, not retard it.

However, the real problem is that with rising wage costs, in order to maintain profit margins, some corporate executives will have to forego their multi-million dollar bonuses they skim off the bottom line! This unfettered greed will not stop until shareholders demand it.

RZ in CT

August 14 2014 at 12:52 PM Report abuse +2 rate up rate down Reply
2 replies to razov's comment
Iselin007

The CEOs and other corporate staff along with other salary managers and supervisors often get raises at the expense of hourly associates and the taxpayers who get stuck with the public assistance charges.

August 14 2014 at 2:39 PM Report abuse -2 rate up rate down Reply
gee.effwye

Discredited? When? And what would you label the economy over the last six uears? Is it still.supply side? Is it different than during the Reagan administration? If yes, how so? Under which administration did we have those rising wages? Which administration created.more.jobs? Which administration saw a faster growing economy/GDP?

As far as the shareholders.go, they approve the CEO compensation/bonuses. When the CEO creates less.value and satisfaction than what they paid them for, they just might cut the CEO.loose.

Hey....are the shareholders greedy as well?

August 14 2014 at 10:54 PM Report abuse rate up rate down Reply