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Opinion: Profits and Wages -- a Worrisome Delinking

Controlling wages helps businesses grow, but without wage increases consumer demand cannot increase.

In 2012, NJ Spotlight will be adding a roster of new columnists. Today, we welcome Joel L. Naroff, a nationally recognized and widely honored economic forecasting expert. Joel will be writing about the regional economy.

The economy in New Jersey is slowly but steadily recovering from the massive recession. Still, the best way to describe business activity is that it is modestly moving along. The state’s unemployment rate is above the U.S. average and is in the top 15 of the highest states. While job gains continue to lag the nation, they are about in the middle of the pack.

In other words, the state is doing better but that doesn’t mean it is doing well.

For instance, though New Jersey firms may no longer be losing money, they are hardly making lots of it. Further, what is helping keep earnings up is that employee pay is barely budging. That creates a major dilemma: Companies need to control costs to improve profits, but if workers are to spend more their incomes must rise. Reconciling those competing demands is critical to the future growth of the state’s economy.

As the stock markets have shown over the past two years, earnings and equity are no longer linked to employment and worker income. In part, that is due to globalization. If you can produce goods more cheaply outside the U.S., corporate earnings may improve, but not the income of domestic workers.

What's more, when the unemployment rate is as high as it is now, domestic businesses are able to restrain wage growth. Improving sales then drop quickly to the bottom line. Either way, profits and wages are delinked.

The problem is the two cannot remain delinked if the economy is to expand more robustly. For local firms, the issue is clear: If customers are not seeing their incomes rise then demand for local goods and services cannot increase. Since wage and salary gains in the state were about half the inflation rate, household purchasing power is falling. That does not bode well for demand or profits.

Will wage gains accelerate this year? The New Jersey Business and Industry Association’s 2012 report indicates that the prospects for compensation and job growth in the state are not good. Only 47 percent of the companies included said their employees would see larger paychecks. Of those saying they will give raises, nearly 60 percent indicated they will less than 3 percent. And 4 percent of the firms expected to cut salaries.

What all this means is that about 80 percent of New Jersey’s workers could experience declining purchasing power.

When the economy is growing strongly, there is money for both pay increases and profits. But with this disappointing recovery, the requirements of businesses to shore up their balance sheets and the necessity of workers to earn higher pay so they can spend more are in clear conflict. As long as those needs stand in opposition, growth will not be able to accelerate.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. In 2011, he received the National Association for Business Economics Outlook Award as the top economic forecaster. His email address is joel@naroffeconomics.com.

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