Stunning jobs numbers mean Amazon wage hikes may spread: Don Pittis

A plunge in the U.S. jobless rate to levels not seen in nearly half a century could be a new turning point for North American wage rates, and not everyone is happy about the prospect.

For workers who have seen wage rates stagnate since the mid-1970sit is a potential cause for celebration.

Fallingunemployment combined with strong economic growthcan be seen asa vindication of Trump's stimulus plan if it can be shown thatthebenefits are flowing beyond the capitalist class and down to ordinary wage earners.

Wages on the upswing?

"Many people believe that instead of being a linear relationship, it's more like a hockey stick," says Frances Donald, head of macroeconomic strategy with Manulife Asset Management. "You reach a point in the economic cycle where, very suddenly, instead of being a gradual response, wages start to take off more aggressively."

If that actually turns out to be the case, Amazon CEO Jeff Bezos, so good at foreseeing the online retail market, may be heralding a change in the job market, too. By being a market leader as an employer, Amazon has had a chance to work out where the money is coming from to pay the higher rate. Competitors playing catchupwill not have that luxury.

There are a number of reason whythat will not make everybody happy, because according to traditional economic theory described by something called the Phillips curve, rising wages are a driver of inflation.

At the time, one of the economists I spoke to said maybe we just had to wait for the effects to feed through the economy. And ifthat's what's happening now, it is exactly what central bankers in the U.S. and Canada have been expecting.

"Central banks including the Federal Reserve and the Bank of Canada have been raising rates despite not meeting the typical wage criteria," says Donald. "Higher wages will be great comfort to (Fed chair Jerome) Powell and (Bank of Canada governor Stephen) Poloz, who have been raising rates in anticipation that wages would indeed follow."

But the Manulifeeconomist says so far, wages have not been rising as fast as traditional economic trends might indicate,which she blames on structuralissues such as the falling age of the U.S. workforce as boomers enter retirement.

Bond market tizzy

Nonetheless, fear that a strong economy, of which falling unemployment is a traditional part, caused a tizzy in bond markets this week. Bond traders, already facing yields above threeper cent earlierin the week, were waiting to see thesejobs numbers. And when they did, U.S. treasury bills fell, pushing interest rates to levels not seen since 2011. (For an oversimplifiedbackgrounder on the inverse relationship between bonds and interest rates, or yields, see this previous column.)

Dangerous as it is to argue withthe bond market,Henry Siu, an economics professor at the University of British Columbia, remains sceptical that wages are beginning to rise at a rate likely to push interest rates higher.

Siu has studied what he calls job polarization, wherewages in the modern job market have grown apart. While workers with specialskills do well in a high-technology job market, the unskilled or less-skilled who would normally earn the minimum wage have been making little progress.

One reason is that jobs that can be replaced by machines are being replaced, and that affects simpler jobssuch as secretarial tasks and warehouse forklift operation. But part of the blame, says Siu,goes to the growing power of large national employers such as fast food chains and retailers like Amazonthat are able to act like monopolists, only in hiring.

"What's increasingly true is that the labour market is becoming less competitive and more what we call in economics, monopsonistic, which is the labour-side analog of a monopoly," says Siu.

The other issue, he says, is that while the unemployment rate is definitely falling, the number of availableworkers is not rising at anything like the rate ithas during previous booms.

"If you look at the more telling statistic, I think it's theemployment to working-aged population ratio," says Siu. "What's true is that number is barely higher today than it was at the end of the 2009 recession."

But whether its purpose is to steal workers from other employers or to draw non-workers back into the workforce, Katie Bardaro, chief economist at PayScale, a company that monitors compensation levels in Canada and the U.S., says increasing wages in one place forces other employers to compete.

Bardarois based in Seattle, also home to the Amazon world headquarters, where the city's minimum wage is already set at $15 USand where it is difficult to find employees.

She says that in that casethe ripple effectis already visible as employers in nearby towns complain: "Well, I can't find workers who want to work here because they'll just go five miles in and, you know, work there."

To get workers to stay, employers have to pay something closer to Seattle wages. Bardarosays that as Amazon begins to mop up workers with higher wages, especially for seasonal employment, the same thing may be happening across the country.

"As it stands now, it's not a large enough move for a large enough group to have an impact on overall inflation, but if it keeps moving in that direction, we could start to see some increasingly inflationary impacts."

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