U.S. Wages Are Shooting Up, Can Companies Take the Hit?

The Biden administration dished out a pretty straightforward tip to corporations desperate for workers: pay them more money. A few prominent firms seem to have taken the hint.

Last week, McDonald’s announced a 10% wage bump for its restaurant workers. Chipotle and Under Armour said they’ll start paying staff $15 an hour, and Bank of America pledged to raise its minimum hourly wage to $25 by 2025.

While some politicians say the moves will stir up inflation, analysts believe these titans of industry can afford to pay up.

Great Expectations

The situation is straightforward, but strange. Despite a strong rebound, the economy is still 8.2 million jobs shy of pre-pandemic levels, with unemployment resting above 6%. In a typical recession, that would translate to millions of people clamoring for a small number of job openings.

But on our timeline, unfilled job openings hit an all-time record of 8.1 million in March. Economists and politicians have differing perspectives on the matter, but here’s a few things we know:

  • A recent analysis by the New York Federal Reserve showed that non-college graduates now expect a minimum salary of $61,483, up more than $12,700 from a year ago.
  • The San Francisco Fed found that in early 2021, 25% of unemployed people got job offers they would typically accept — but one in seven of those opted for unemployment benefits instead.

Some analysts argue the job situation will reach equilibrium in the coming months as children return to school and concerns of unsafe work conditions diminish.

Paid in Full: Other analysts argue the widening gulf between corporate profits and labor costs means there is more than enough “room” for companies to pay workers more. Since the early 1980s, the ratio of employee compensation to corporate profits has fallen from 8/1 to 5/1, according to Moody’s.

“If you are seeing these pressures in an environment where the economy was weaker, this would be a disaster, but we’re not,” said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. “We’re seeing it in an environment where companies have massive pricing power, which means they can pass it on.”

the takeaway

Inflation can take time to manifest, but for those worried about their lunch bill – the price of a big mac hasn’t gone up a penny during the pandemic.

become smarter

Subscribe to The Daily Upside.

Become smarter with only 5 minutes every morning.