What the wage escalation trend means to buyers
By Elizabeth Baatz -- Purchasing, 9/16/1999
Wages and salaries among U.S. workers took an unexpected turn in second quarter 1998. According to the U.S. Labor Department's employment cost index, wages and salaries among civilian workers rose 2.5% from the first quarter to the second. At an annualized rate that means workers enjoyed a whopping 10.2% wage hike.That's unusual because slow-growing wages and salaries have been hallmark features of the economy during the 1990s. From 1992 to 1994, wages and salaries grew at a low 2.9% annual pace each year. Since then wage gains have been slowly accelerating. In 1998, wages and salaries among civilian workers rose 3.8% and are forecast to grow 4% in 1999.
Many are worried now that the second quarter wage gain signals the beginning of a steeper wage rate escalation trend that will threaten the low-inflation mantra sung by the Federal Reserve Board. Indeed, purchasers have been struggling with the wage question for months now as suppliers attempt to push through price hikes based on tight labor markets.
But just how relevant is the wage argument among the industries that supply products and services to U.S. companies? The answer, naturally, depends on the specific industry.
Among 508 industries analyzed in Thinking Cap Solutions' Industry Cost Escalation Model, only 47 saw wages and salaries for direct labor rise by 4% or more in the year ending June 1999. Another 169 industries experienced wage gains between 3% and 3.9%.
White-collar workers in service industries, of course, have enjoyed some of the largest wage gains. For example, wages and salaries among management consulting companies rose 6.6% in the year ending June 1999, on the heels of a 5.8% hike the year before. Equipment leasing companies, computer and data processing companies, personnel supply services, advertising and law firms also doled out the most generous pay raises of between 6.5% and 5%. Buyers of these services have long had to battle the burden of fast wage growth.
But purchasers of industrial products have not been immune from some wage escalation challenges either. Some of the biggest wage swings between 1999 and 1998 have been seen among industries that make key components. The industry that makes automotive and apparel trimmings, for example, saw its direct wages and salaries bill rise 1.7% in 1999, after falling 5.7% in 1998. Such a big swing in wage escalation most likely threw a monkey wrench into cost-control efforts of suppliers and buyers alike.
Buyers also should be alert to large wage swings in the internal combustion engine industry. Here wages grew 6.8% in 1999 after inching up just 0.2% the year before. The industry that manufactures noncurrent-carrying wiring devices likewise saw wages grow 4.7% in 1999 after a 0.8% hike in 1998. And direct wages in the automotive stampings industry grew 2.5% in 1999 after falling an estimated 0.5% the year before.
Other industries that saw unusually strong labor cost escalation in June 1999 compared to 1998 included manufacturers of steel castings and other steel foundries, hardwood dimension and flooring, speed changes and drives, environmental controls, metal forming machine tools, and narrow fabric mills.
On the flip side, several industries are still seeing wages fall at a hefty clip. For example, direct wages and salaries in the malleable iron foundries industry fell 6.1% in the 12 months ending June 1999. Engine electrical equipment manufacturers enjoyed a 5.3% wage drop and nonferrous wire drawing and insulating companies saw wages fall 4.3%.
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