Falling Jobless Rate Boosts Wages but Fuels Concern on Prices and Profits

Times Staff Writer

A strong job report Friday helped revive a troubling theme prominent during the economic boom of the late 1990s: What’s good for workers may not necessarily be good for investors and monetary policymakers.

The U.S. Labor Department reported a solid gain in jobs in January along with significant upward revisions in employment for November and December. The unemployment rate fell to 4.7%, its lowest level in more than four years, while workers’ average hourly earnings rose more than expected. Wage growth on an annual basis hit a nearly three-year high.

The percentage of unemployed people without work for at least six months -- what is considered to be long-term unemployment -- declined sharply.


The bottom line: The labor market is tightening, which means more bargaining power and stronger wage growth for workers. Their earnings have failed to keep up with inflation during a five-year economic recovery marked by rising energy costs and growing competition with low-wage countries such as China and India.

Sluggish wage gains, along with lackluster job creation during the early part of the rebound from the 2001 recession, are a primary reason many Americans have been skeptical about the economy’s strength and dissatisfied with President Bush’s economic policies.

But the prospect of better rank-and-file pay and lower joblessness spooked some investors Friday because it threatened to reignite inflation and limit corporate profit growth.

Investors fear that inflation pressures could force the Federal Reserve and its new chairman, Ben S. Bernanke, to boost interest rates more than hoped for. That, along with weakened profit growth, could halt what has been a promising 2006 stock market rally.

Some analysts Friday altered their forecasts of what the Fed will do, with the prospect of rate hikes in March and May now seen as more likely. Before Friday, many had thought the central bank would raise rates at its next policymaking meeting March 28, the first for Bernanke, but take a breather in May.

“Today’s labor report could not have been more disheartening to those who thought the Fed had ended its monetary tightening,” said Eugenio J. Aleman, senior economist at Wells Fargo & Co. in Minneapolis, who now predicts the Fed will raise its benchmark short-term rate to 5% in May, instead of stopping at 4.75% in March.

More Fed rate hikes could lead to higher mortgage rates, further cooling a once red-hot housing market, analysts said.

The stock market, which had been primed to open higher Friday morning before the release of the job data, stumbled instead, with major indexes closing lower. The Dow Jones industrial average dropped nearly 60 points and the Nasdaq composite index lost nearly 20.

The market has been weak since Tuesday, when the Fed raised rates and signaled that inflationary pressures could lead to more increases.

Friday’s stock market tumble after good news for workers was reminiscent of the late 1990s. Then, investors often cheered weak employment numbers because they reduced pressure on the Fed to boost interest rates.

The return of such a dynamic “is unsettling for me,” said Jared Bernstein, economist at the liberal Economic Policy Institute in Washington.

“Don’t take the punch bowl away just because workers are arriving at the party.... The fact that wages are catching up to inflation is a good thing and a dynamic we ought to nurture, not stomp on,” Bernstein said. He said stronger wage growth would stimulate the economy and boost consumer spending, which helps corporate bottom lines.

Friday’s job report provided strong evidence that the economy was rebounding from a surprisingly weak final three months of last year, analysts said.

U.S. employers in January added a net 193,000 jobs, an improvement from the revised 140,000 in December, the Labor Department reported Friday. Although the January number was lower than the 250,000 that had been expected by economists, job creation for the two previous months was revised upward by 81,000 positions.

Good weather in much of the country was given some credit for the strong job gains. Hiring growth was spread across many sectors, with increases in such fields as construction, mining, food services, healthcare and financial activities. Construction added 46,000 jobs amid Hurricane Katrina rebuilding efforts, while service industries gained 135,000 positions.

Meanwhile, the 4.7% unemployment rate represented a 0.2-percentage-point drop from December and was the lowest rate since July 2001, when the figure was 4.6%. The number of people without jobs plunged 335,000.

The percentage of unemployed workers who had been jobless for at least six months fell to 16.3%, down from 18.2% in December and 21% a year earlier, and was the lowest level since March 2002. Stubbornly high long-term unemployment, including among people with college degrees, had been a key reason some analysts considered job creation in the current recovery to be subpar.

Average hourly earnings rose to $16.41 last month, up 0.4% from December, better than the 0.3% gain expected by economists. On a year-over-year basis, hourly wages increased 3.3%, the highest growth rate since February 2003.

The economy added 1.98 million jobs during all of 2005, down from the 2.1 million generated in 2004, according to annual revisions by the Labor Department released Friday.

Not surprisingly, the Bush administration lauded the job report.

President Bush, speaking in Rio Rancho, N.M., where he took part in a discussion at Intel Corp. about the role of research, development and technology in the nation’s economic future, said, “We’ve got a strong economy.”

“We got steady growth. And that’s important. We want our people working. We want people to be able to realize opportunity and hope. And in order to do that you got to have a growing economy, obviously,” Bush said.

Accelerating wage growth indeed is the norm for the latter stages of an economic recovery, as was the case in the late 1990s. Under these conditions, businesses typically expand to meet growing sales, but amid falling unemployment, they must bid up wages to attract workers. Knowing this, people with jobs seek higher raises -- and increasingly have the bargaining power to get them.

But some analysts said it was still too soon for workers to fully celebrate their improving wage fortunes.

The 3.3% annualized wage gain still lags behind the 3.4% yearly inflation rate, economist Bernstein said. And continuing pressures from globalization will subdue wage gains for some workers, he said. Employers in many industries still can shift production to countries with cheaper labor.

“If you are a white-collar worker in an occupation where information can be digitized, there is a good chance you are competing now with workers who are equally skilled but earn a tenth as much as you do,” Bernstein said. “Of course that will have an impact.”


Times staff writer James Gerstenzang in Rio Rancho, N.M., contributed to this report.