How To Break Out Of The Stagnant Wage Growth Trap
As equity markets hit new highs and home prices continue their ascent, there is a renewed sense of optimism across America. This is no doubt positive for asset owners. But what really counts—real median wages—have only risen 9% since 1979.
Compare that to the 91% rise in real wages in the 25-years after the end of WWII.
So, what gives?
The weak wage growth can be traced to multiple trends that have been in motion since the 1970s. From 1948 until the early 1970s, wages rose in tandem with productivity. However, since 1973, productivity has grown 72% while wages are up a measly 9%.
What’s behind the stalled wage growth?
There has been an ever-wider gap in income inequality. The top 5% of earners saw their wages swell by 60% since 1973. The top 1% reaped a 138% increase. Today, Fortune 400 CEO’s earn 296-times the average American wage—up from 24-times in 1973.
Globalization has dragged down wage growth. Millions of manufacturing jobs were lost to Asia, and the backbone industries that built the American economy were gutted. The loss of these blue-collar jobs forced many workers into lower-paying jobs, thus suppressing wages.
The ballooning cost of employee benefits has also weighed on growth. The Bureau of Labor Statistics found that employee benefit costs have increased by 60% since 2001.
The key question is whether this trend can be reversed.
A Catch-22 Situation
The harsh truth for the average American is that globalization and income inequality are not easily turned around.
There has been a backlash against globalization across the West in the past few years. The catch is that the cheap imports Americans have enjoyed because of it has partly offset the pain of anemic wage growth.
As we’ve discussed before, if the US takes a protectionist path, it would shrink trade and push up the costs of imports. Corporate profits just emerged from six straight quarters of negative growth, so I doubt firms can afford rising costs.
As protectionist measures—like tariffs—would negatively impact economic activity and shrink corporate bottom-lines, such moves are likely to hinder, not help, wage growth.
Income inequality is also a tough fix. A major reason the income of top earners has outpaced that of the average American is the Federal Reserve’s loose monetary policy. Thirty-five years of falling interest rates and multiple bouts of asset purchases have inflated asset prices. It has done little to increase real wages.
Trump’s pro-growth policies—coupled with rising interest rates—are positive for wages, but they have problems, too. The total federal debt is fast headed to $20 trillion. It is very unlikely interest rates could be raised to historic norms. The US simply can’t afford the higher interest costs.
A solution to these problems will require serious policy changes. The final solutions may lie at the national level, but the changes would not be politically popular. No matter, there are steps you can take to ease the struggle against stagnant wages.
Make the Trend Your Friend
We can see what’s behind the divergence in wage growth by looking at the income breakdown for America’s top earners.
For those who earn under $100,000 per year, the split between income from salaries/wages and capital gains is roughly 75%/0%. For those in the $500,000 to $1 million range, it’s about 53%/12%. In the over $5 million bracket, it’s around 17%/46%. Stagnant wages have caused wealthier individuals to become less reliant on wages or salaries. Instead, they earn an increasing portion of their income by putting their capital to work.
With wage stagnation likely to continue, 2017 could be a good time to enter the markets. Given the Fed’s projection for three rate hikes this year, coupled with an increase in economic growth, there looks set to be an influx into US stocks.
On the back of the Fed’s new stance on rates, the rate on the 10-year Treasury is up 85% from its July 2016 lows. The spread between the US 10-year and its German counterpart is now at multi-decade highs. Given the setup, we are likely to see foreign capital flood into US assets. We have already seen signs of this with the US Dollar Index up 8.5% since September.
With little in the way of investment competition, US bonds look relatively attractive, but equities will be the best place to earn returns. The US equity markets are a big hunting ground. The trick is to know which sectors will benefit most given the current setup.
Let’s double-back and look at the income breakdown of America’s top earners.
For those with incomes above $5 million, around 15% of it (in 2012) came from dividends and interest. Given that bond yields are still near historic lows, and foreign capital is likely to flow into the “waterfront,” it may be time to focus on large-cap dividend stocks.
Another sector investors should look into to is Peer-to-Peer (P2P) Lending. The P2P sector has grown rapidly in recent years and is an excellent new source of fixed income. In 2016, P2P investors earned net annualized returns north of 7%. Even those who took the most conservative approach saw returns of 5%. That’s more than double the average S&P 500 yield.
In today’s low-yield climate, institutional investors are also getting onboard. Although the industry started out as peer-to-peer, the likes of Goldman Sachs and Morgan Stanley now fund around two-thirds of P2P loans. If you want to learn how to get started in P2P investing, you can download our free report, Welcome to the Bank of You.
In an era of stagnant wage growth, investment returns are one of the best ways you can boost your income. That means looking at ways to earn dividends while we wait for the capital gains.
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