Are Labor Costs Really Rising ?

I mentioned yesterday that I found two recent pieces of government data unbelievable:

• I don’t believe housing prices are holding up;

• I don’t believe Labor Costs have risen appreciably.

That Labor Department report that pressured equities the past few days? I did not buy into the idea that unit labor costs had surged in Q1; Neither, apparently, did Floyd Norris:

"Robert Barbera, the chief economist of ITG, points out that the driving force in that change was a revision in the figure for growth in wage and salary income. And while you may think wage and salary income is just that — the money you get directly from your employer — the government also includes the profits people make from cashing in stock options.

“It almost certainly was a consequence of an explosive exercise of options,” Mr. Barbera said.

When the government first estimated the first quarter figure for growth in wage and salary income, it came up with an annual rate of 7 percent. That was reasonable based on the data it had, which come from the monthly employment numbers. But since then it has gotten real data, which led to the increase.

The stock market struggled late last year, and then rose nicely early this year. What this almost certainly means is that a lot of people cashed in their stock options. That is good for them, but it is not a sign of inflation."

In Q1 of 2000, wage and salary income grew at a rate of 15 percent, but then fell to 2 percent in the second quarter, also based upon the exercise of options.

ITG’s Mr. Barbera notes that the pace of options exercises slowed down in Q2, and the annual growth rate of wage and salary is below the original estimate of >7%.  He estimates it at only 1 to 2%.

Isn’t that just like Wall Street?  After denying that inflation exists for 4 years, they finally see it — precisely where it isn’t — in wages and salaries . . .


Inflation Sign? Don’t Bet on It.

Floyd Norris
Norris Blog, September 7, 2006,  12:01 pm

Labor Costs Shake a Pillar of Fed Policy   
NYT, September 7, 2006

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