How Long Can Workers Tread Water?
James Barnes, a $350-a-week guard at an office building on Madison Avenue in Midtown Manhattan, has not had a raise in years. But his income just jumped sharply: Three months ago, he took on a newspaper delivery route from 3 a.m. to 7 a.m., which pulls in an extra $235 a week.

Mr. Barnes fits snugly into the pattern of America's current economic expansion. The wages of typical workers are treading water, growing roughly at the same rate that inflation eats into their buying power. Last week, the Labor Department reported that average wages for production and nonsupervisory workers in the private sector, about 75 percent of the labor force, reached $16.06 an hour in June, just 2.7 percent above the level a year ago.

Yet in terms of the aggregate effect on the total economy, that statistic does not seem to matter much. Workers' wages may be barely keeping up, but Americans' average incomes are growing briskly - in part, because of growth in the overall number of jobs, including Mr. Barnes's extra one. But it also reflects other forms of income, flowing mostly to the more affluent, which are fueling the consumer spending that has provided a crucial pillar of support for economic growth over the last three years.

"You have a lower half of the wage distribution in the United States that has not experienced any income gains for a long time now," said Barry P. Bosworth, an economist at the liberal-leaning Brookings Institution. "But from a macro perspective this doesn't have much impact."

Even as the average worker's wages are stuck in neutral, corporate profits, professionals' incomes, gains from investments and executive compensation - the kind that frequently comes in the form of stock options - are all surging, supporting healthy gains in the economy.

"Profit has roughly doubled in the last year on revenue growth of about 40 percent," said Alex Mann, co-owner of, a company in San Francisco that sells time-sheet applications over the Internet. "The top-line growth was very satisfying. There's been very strong growth in the amount left for compensation of the owners and for profits."

To be sure, income growth has slowed from its torrid pace - year-on-year growth of real disposable income decelerated to 3.7 percent in the first quarter of 2005, from 4.7 percent in the fourth quarter of 2004, which enjoyed a jolt from Microsoft's $3 billion dividend payout.

But that is still plenty strong enough to support substantial output growth, which is expected to advance about 3.5 percent this year, after accounting for inflation. The income gains have been powerful enough to overcome the headwind of surging oil prices, which have pushed gasoline to over $2.25 a gallon.

Surging incomes are also helping the federal government reduce the budget deficit. Federal tax receipts in the first nine months of the current fiscal year, which began last October, reached $1.6 trillion, 15 percent more than in the fiscal 2004 period.

And there are scant signs that spending is on the wane. Mr. Mann just bought an iPod. With the prospect of more take-home pay, even Mr. Barnes joined the shopping crowds, spending his income-tax refund on a secondhand Dodge Caravan minivan. "It's good because I enjoy it," Mr. Barnes said, "but I need it for my second job."

Last month, retailers recorded the most robust sales increases in more than a year. Wal-Mart Stores reported that sales grew 4.5 percent at stores open at least a year, the fastest in 13 months; over all, its sales were up 11 percent. Moving to the upscale end, sales at Neiman Marcus increased more than 9 percent.

Similar jumps at Target and J. C. Penney prompted the companies to raise quarterly profit forecasts.

The skewed nature of the income growth comes as little surprise to most economists. Reeling from collapsing profits, businesses emerged from the economy's slump in 2001 with a pronounced aversion to part with money, instituting spending and hiring freezes and keeping them in place even as demand recovered.

These cost controls helped propel a burst of productivity growth and profitability. Corporate profits jumped 35 percent from 2002 to 2004, as increases in revenue dropped unhindered to companies' bottom lines. Income from workers' compensation, including wages and benefits, grew 9.5 percent.

In the first quarter of 2005 profits grew a further 15 percent, compared with the period last year, twice the pace of compensation for employees. And what growth there has been in compensation for workers has mostly concentrated at the top. At the bottom end, income growth has mainly come from an increase in employment - not better wages.

Robert E. Mellman, an economist at J. P. Morgan, noted that the jumps recorded in wage income in the last quarter of 2004 and the first quarter of this year were principally from a flurry of exercised stock options. "It was profit-related pay, a symptom of high profits," Mr. Mellman said.

This skewed pattern of income growth readjusted the distribution of the national pie. After falling to a trough of 8.5 percent in 2001, corporate profits' share of national income soared to 12.3 percent in the first quarter of this year, the highest level since the mid-1960's. The share of income accruing to workers' compensation, on the other hand, fell from 66.2 percent in 2001 to 63.9 percent in the first quarter of 2005.

Yet there are signs that the squeeze on labor might be easing as unemployment has fallen to 5 percent and the job market has tightened, nudging the pendulum back in workers' favor and giving them a chance to claw back some income gains. "At the margin, labor could do a little better," Mr. Mellman said.

In its latest survey on compensation trends, the consultant Hewitt Associates found that companies' budgets for salary increases for nonexecutive workers should grow slightly this year, after four years of decline. Only 1 percent of companies plan to maintain salary freezes this year, from 8 percent two years ago.

And according to a study by Elise Gould, an economist at the Economic Policy Institute, a left-leaning research institute in Washington, jobs in higher-wage industries are growing faster than jobs in low-wage businesses for the first time since the summer of 2001.

Workers themselves are more optimistic about their job prospects than they have been for some time.

In June, the University of Michigan's consumer sentiment index showed a 12-point jump in confidence among families earning less than $50,000 a year, the biggest jump in at least three years. The percentage of consumers saying jobs are "plentiful" in the survey rose to the same level as those saying jobs were "hard to get" for the first time since 2002.

Yet this peppering of data notwithstanding, economists are not too sanguine about the immediate prospects for income growth on the bottom rungs of the wage scale. "The job market is slowly tightening," said Jared Bernstein, a labor economist at the Economic Policy Institute. "We are wringing out the slack. But we're only six months into a process that could take a year and a half."

At local 32BJ of the Service Employees International Union - which covers janitors and other building workers in several Northeast states - the president, Mike Fishman, is not optimistic either. "In our industry we don't see any pressure on wages going up," he said. "Nobody is rushing to the table with money."

With increasing competition from cheap labor in poor countries, falling unemployment in the United States is not giving American workers much leverage to increase their slice of the income pie, said Robert J. Barbera of ITG/Hoenig in Rye Brook, N.Y. "I expect labor's share to still be under pressure," he said.

But that might not matter, macroeconomically speaking. Mr. Bosworth at Brookings noted that there was no evidence that incomes at the bottom of the distribution must grow to keep spending afloat. "The rich are willing to consume," he said.

And, Mr. Barbera pointed out, across the broad range of variables that underpin economic growth, "it doesn't get any better."
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