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Wage Growth Remains Muted Despite Labor Shortages

Posted by Karen Choi on Jun 10, 2014 12:10:00 PM

Economic theory holds that rising employment and widespread labor shortages drive up wages.

Compensation and WagesWell, so much for theory.

At a time when employment in Massachusetts has finally surpassed its all-time high set in 2001 and employers in multiple industries cannot find qualified workers, wage and salary growth in the Bay State remains strangely muted.

The 2014 AM General Wage Survey finds that Massachusetts employers increased wages and salaries by an average of 2.71 percent this year, a slightly faster pace than the 2.53 percent posted in 2013, 2.55 percent in 2012 and 2.4 percent in 2011. Fifty-five percent of the companies taking part in the survey are giving raises of exactly three percent as employers coalesce around what appears to be a safe wage increase level that does not get out ahead of the economy.

The percentage of companies providing no wage increases dropped in half from 14 percent in 2013 to 7 percent this year.

Wages at 2.71 percent are growing faster than prices, which are increasing at 1.7 percent annually in the Boston area.

Analysts believe employers still fear economic and political uncertainty, even though incomes, balance sheets, credit availability and other factors driving consumer and business spending are improving. It is a fear that kept the AIM Business Confidence Index locked in a narrow, four-point range for 18 months before turning upward in April and May.

"The ongoing strengthening of the economy still feels more like a prolonged convalescence than like robust health,” said Raymond G. Torto, Global Chairman of Research at CBRE and Chair of AIM's Board of Economic Advisors (BEA.)

“Consumer confidence reports are mixed; federal spending cuts continue to affect Massachusetts companies and institutions; quantitative easing is winding down; the Affordable Care Act is raising more issues for many employers than expected; and financial problems in emerging economies cast a shadow on global prospects.”

Wage and salary increases are fairly steady across industry and employee types. Average raises for 2014 fall between 2 and 3 percent across manufacturing, service and other companies. Executives are seeing the smallest jump in paychecks at 2.55 percent, while exempt employees lead the pack at 2.75 percent.

Only one percent of companies plan salary reductions for any class of employee in 2014. One in five companies, meanwhile, maintains a formal incentive compensation program that offers bonuses ranging from 7 percent to 30 percent of salary.

The conservative approach by employers to compensation may be consistent with a state unemployment rate that has dropped only haltingly to 6 percent after peaking at 8.7 percent in October 2009. But the numbers also belie a growing body of evidence that both the US and state economies are strengthening:

  • U.S. equity markets surged between 25 and 30 percent during 2013.
  • The national economy has created an average of 183,000 jobs per month during the past year.
  • Massachusetts economy grew at an annual rate of 3.5 percent during the most recent period for which statistics are available.
  • Bay State venture capital firms raised $5.4 billion for new investments, more than triple the amount raised in 2012.
  • The commonwealth posted 3.396 million jobs in March 2014, finally surpassing the previous high of 3.391 jobs recorded in February 2001. Employment gains in Education & Health Services (+34%), Leisure & Hospitality (+20%), Other Services (+11%) and Professional, Scientific and Business Services (+2%) offset declines in Manufacturing (-39%), Information (-22%), Financial Activities (-11%), Construction (-11%), and Trade, Transportation & Utilities (-6%).
  • Worker shortages caused by both skill gaps and demographic changes are pervasive throughout the Massachusetts economy. The 2013 Massachusetts Job Vacancy Survey indicates that five percent of all jobs in the Bay State – 135,000 positions in all – stood vacant at year end. Vacancy rates ran 6.1 percent in computer and mathematical occupations, 4.8 percent in healthcare support occupations and 2.7 percent in manufacturing.

Economists believe that continued steady job growth coupled with increasingly critical skill shortages will inevitably push wages beyond the 3 percent comfort barrier for employers. The question is, how soon?

It’s already happening in a few specialized technical areas. Software engineers command six-figure paychecks and companies such as Cambridge-based Hubspot are paying bonuses of up to $10,000 for referring engineers.

Manufacturing, heavily represented in the AIM General Wage Survey, may provide a more interesting long-term test case. The significant decline in manufacturing employment since 2001 has clearly created a short-term buyer’s market for labor among companies that build things. But a projected 100,000 job vacancies through retirements during the next 10 years and relentless technological innovation will at some point exert upward pressure on wages, especially in advanced manufacturing occupations.

It’s shaping up to be an interesting decade.

Topics: Compensation

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