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