Why Is Wage Growth So Lousy?

Elliot Eisenberg, Ph.D., GraphsandLaughs, LLC

While the most recent jobs report showed the unemployment rate at 4.0% — the lowest rate in almost 50 years — it also showed annual wage gains running at just 3.2%. While that is the best rate of growth in over a decade, late in the last business cycle, wage gains were over 4%, and at the height of the dot.com bubble, wage gains were over 5% a year. Shouldn’t the current tight job market result in faster wage growth as employers compete for increasingly scarce workers? The answer is “not really,” and it’s for several reasons.

Elliot Eisenberg

The single most important reason for slow wage growth is weak labor productivity growth, or the increase in output per worker per hour. As firms pay workers more, they try to keep their profit margins up by squeezing out inefficiencies, and thus pay for the higher wages out of increased worker productivity. Back in the 1990s, labor productivity growth averaged about 3% per year. In the run-up to the housing bust, it was well over 2%. By contrast, today’s productivity growth is about 1%! As a result, employers are not so eager to raise wages as they tend to reduce profits.

Another major reason is demographics. Twenty years ago, the baby boomers were all in their prime working years. Today, close to 11,000 per day retire and are being replaced by millennials. The problem is that since millennials are just starting their careers, they earn considerably less than the retiring boomers. More importantly, the number of millennials entering the labor force numbers about 14,000 a day, exceeding by about 3,000 a day — or 90,000 a month — the number of retiring boomers. While older generations have always retired as younger generations have entered the labor force, never have the two groups been of almost equal size. After accounting for this, wage growth is currently closer to 4%.

The final significant reason for slow wage growth is a lack of inflation. In the late 1990s, inflation, as measured by the CPI, was 3.5% per year, and was roughly 4% per year during the housing boom. Since 2010, however, inflation has been remarkably tame and has hovered right around 2%. As a result, employers have not had to increase pay that much to keep up with inflation. If, for example, employers aim to increase real pay by 1% per year during the housing boom, that would have meant pay raises of 5%; today, 3% will do.

There are, of course, many other reasons why wage growth is weak. They include a decline in the strength of unions, the increased prevalence of non-compete clauses in employment contracts, and global supply chains — all of which reduce the bargaining power of workers. There has also been a steep decline in the number of new firms, in part due to the rise of super-firms like Google, Amazon and Facebook, which generally buy out any potential competitors, also reducing employer options. Last, but certainly not least, comes the dramatic rise in state licensing requirements which make it much more difficult for employees to work in other states, even if good jobs in the same field are available.

While wage growth is not as strong today as it has been in prior recoveries, there are many reasons why. Hopefully, labor productivity will improve going forward, as that is something that employers and employees both benefit from. In addition, it would be great to see states reduce or eliminate licensing requirements where possible. And, where that is not possible, encouraging reciprocity across state lines would be a great improvement.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com.

New Year, Newsom, New-ish Bills

By Dennis Albiani and Faith Borges

Democratic supermajorities were sworn into both houses of the Legislature in December and the New Year brought in a sweep of Democratic statewide office holders being sworn into office, the most notable being Governor Gavin Newsom. The success of Democrats was of little surprise in a state where GOP registration has fallen to a third-party level, trailing registration of decline-to-state voters.

Dennis Albiani and Faith Borges

However, what was surprising was that within a few hours of taking the oath of office, the new Governor took to Facebook Live to sign a number of first-in-the-nation executive orders. Subsequently, within just a few days being sworn into office, Governor Newsom departed from the brief remarks of his predecessor and gave a lengthy presentation of the largest proposed budget in the state’s history.

Press releases, tweets, and a 280-page budget summary has affirmed speculations carried over from a long campaign trail that the new administration has a pretty long wish list of policy priorities for the coming months and years. How to fund this list will be the topic of debate before a final state budget must be passed on June 15th. Here are a few of the big-ticket items that are likely to be the focus for business community engagement.

One of labor’s top priorities this year will be codifying the state Supreme Court’s Dynamex decision, which made it tougher for businesses to rely on independent contractors. Businesses fear that the decision will hurt the growing gig economy and will hinder their ability to hire temporary staff or part-time employees. There is currently placeholder legislation from both sides of the aisle that will be amended in the coming weeks with partisan efforts to tackle the issue.

The Governor’s budget proposes efforts to expand the paid family leave (PFL) program, which allows employees to take time off to care for a new child, an ill family member, or to recover from a serious illness and receive 60- to 70 percent income replacement, which is funded through deductions from employee paychecks. Assembly Member Loren Gonzalez Fletcher, D-San Diego, has introduced placeholder legislation to extend the use of the state’s PFL program from six weeks to six months and guarantee 100 percent wage replacement for workers earning up to $100,000 per year. The budget will go through several months of reconciliation in the Legislature and there are still several weeks before the deadline to introduce policy bills.

Taxes are sure to be on the agenda of the Legislature and new administration. Imposing a sales tax on services has been proposed for several years. California’s boom-and-bust revenue cycle can make it difficult to provide consistent funding for state programs, including education and social services, and this has created many discussions on how to reform our tax code. Some legislators propose that a sales tax on services will “modernize” the tax code, more properly representing the state economy and flattening out the cycles. However, it could cost small businesses tens of billions of dollars in taxes annually.

Proposition 13 provides both residential and commercial property taxpayers important protections, including a uniform 1 percent property tax rate and limited yearly increases in assessed value to no more than 2 percent. In an effort to raise billions of dollars in new taxes, a new “split roll” would split commercial properties from residential and bring those property taxes to current market value, causing drastic cost increases for small-business owners who own and rent commercial property space. A split roll initiative has already qualified for the 2020 ballot and there is speculation that proponents will leverage the legislative process with the existing initiative.

Beyond these specific policy issues, business owners are more broadly hoping for a more receptive audience among legislators and the new governor in the new year. We hope policymakers view the employer community as a partner — not an adversary — in accomplishing many of our shared goals, and we hope there is a deeper appreciation for the many challenges employers face in the state.

The Family Business Association of California remains poised to represent family business to the Legislature to encourage positive reforms and to defend against hostile, unfavorable legislation. If you would like to participate in these legislative efforts, please plan to attend the Capitol Conference on May 14th and email Executive Director Bob Rivinius. Thank you for your membership and investment in family businesses.

Economic Forecast 2019: Good, But Not as Good as 2018

By Elliot Eisenberg, Ph.D.

Despite increasing political uncertainty, a split Congress, trade concerns, financial-market volatility, and slowing global growth, from an economic perspective, the next 12 months should be decent. The odds of a recession have roughly doubled but remain relatively low –- about 25% — despite being just a few months away from the longest economic recovery in US history. While growth is slowing in all major economies, inflationary pressures are surprisingly tepid. As a result, the Fed will have the luxury of raising rates at a very leisurely pace, and thus hopefully avoid prematurely ending the continuing, albeit slowing, expansion that we will experience in 2019.

Elliot Eisenberg

A major reason for the slowdown is the fading of fiscal stimulus from tax cuts passed in December 2017 and debt-financed spending increases totaling $400 billion passed in February 2018. Collectively, this should clip GDP by close to half a point. Add to that global slowing, trade concerns, a strengthening dollar, Brexit fears, and other threats — and GDP growth during the next 12 months should average 2.3%, down from 3.0% in 2018.

Despite slowing growth, unemployment will continue declining from the current rate of 3.7% to 3.5% and maybe as low as 3.4%, rates not seen in more than 50 years! As the labor market tightens, wage growth should increase in 2019, from 3%/year last year to 3.3%/year and maybe 3.5%/year by year end 2019, a healthy rise. Inflation, as measured by the PCE, the Fed’s favorite measure, looks to flatline at 2% in 2019, while core inflation (which excludes food and energy) will edge up slightly from 1.9% to 2.1% due to rising wages.

Because of the very slow rise in core inflation, the Federal Reserve will raise the federal funds rate from 2.375%, where it is now, to at most 2.875% by year’s end, with a quarter-point rate increase in June and possibly another one in December. 10-year Treasuries will end 2018 at 3.35%, up from the current 2.8%, and the rate on 30-year mortgages will end 2019 no higher than 5.1%.

As for housing starts, the combination of high land costs, rising worker wages and input costs, and the reduced benefits of homeownership resulting from last year’s tax reform should see them increase by no more than 2% to 1.28 million. Single-family starts will likely total 900,000, up from 883,000, while multifamily starts should flatline at about 380,000.

New and existing home sales should both remain largely unchanged in 2019 and end the year at 620,000 and 5.3 million respectively, with mortgage purchase volume rising by $50 billion due to higher prices. Refinance activity should fall by about $60 billion because of the rise in mortgage rates. Housing inventories will rise slightly, but due to the combination of continued strong household formation and insufficient new home building, home prices will still rise by 4%, less than last year.

In summary, growth in 2019 looks to be slower than what we became accustomed to in 2018. This is attributed to slowing global growth, increasing trade concerns, a growing worker shortage, higher interest rates, and substantially less fiscal stimulus coming from Washington. Although the Fed may raise rates as much as two times next year, strong consumer spending combined with continued employment growth and rising wage growth should keep the economy on track. The chances of a recession, while meaningfully higher than in 2018, remain relatively low.

Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70-word economics and policy blog can be seen at www.econ70.com.

Frivolous PAGA lawsuits are making some lawyers rich, but they aren’t helping workers or employers

This op-ed by FBA Chairman Ken Monroe appeared in the Los Angeles Times on December 6, 2018

Fourteen years ago, California set up a new method for enforcing its complex wage and hour laws.

Ken Monroe Family Business Association of California

Ken Monroe

The legislation, called the Private Attorneys General Act, or PAGA, allows private attorneys to sue employers on behalf of a class of company employees.

The ostensible motivation behind the law was to protect workers. But in reality, PAGA lawsuits have made it more difficult for family-owned businesses like mine to be flexible with employees. Predatory trial lawyers take advantage of the law, using as their playbook the more than 800 pages that make up California’s labor code.

PAGA lawsuits have made it more difficult for family-owned businesses like mine to be flexible with employees. PAGA sets penalties for each labor code violation, no matter how minor: $100 for each employee per pay period for an initial violation, and $200 for each employee per pay period for each subsequent violation, and other possible penalties. These violations can be stacked, with multiple penalties for each statutory wage violation.

As I learned the hard way, these penalties can add up fast, easily reaching hundreds of thousands of dollars for a small company like ours (and millions for larger businesses). The end result is that employers have to enforce onerous labor regulations that often do not benefit employees, or risk getting sued. For instance, we have employees who start their work day early and don’t necessarily want to stop for lunch at 10 a.m. They would rather wait until their friends take their lunch breaks, so that they can eat together.

As a family-owned business, we wanted to take employee desires into account, so we used to let them wait to eat — even though state law requires that hourly employees take a half-hour meal period after five hours of work, whether they want to or not.

Then, about two years ago, we were hit with a PAGA lawsuit. A disgruntled former employee had linked up with San Diego trial lawyers who specialize in such suits. Like virtually all companies that find themselves the target of a PAGA or class-action lawsuit, we negotiated a settlement rather than take the risk of losing in court and facing the onerous maximum penalties prescribed by the law.

In what was a pretty standard negotiation, the attorneys received 35% of the settlement, the state got 2%, the mediator got 2% and the disgruntled former employee got $7,500. The 300 employees that made up the class action each received between $23 and a few thousand dollars.

Our employees did better than some plaintiffs, at least. Google recently paid $1 million to settle a similar lawsuit. Its employees got $15 each, while the lawyers who brought the case walked away with more than $300,000. Uber drivers did even worse. They got $1.08 each, the lawyers $2.3 million.

The law of unintended consequences has since kicked in at our company. We have had to institute strict rules about meal and rest breaks and the accuracy of time cards, to ensure that we are always in compliance with California’s complex labor laws.

Now employees who want to work through their lunch so that they can go home early or eat with fellow employees are simply out of luck. We cannot legally accommodate their reasonable requests. The company cannot risk another PAGA lawsuit.

We’ve received many complaints from our employees about our strict adherence to every clause on every page of the labor code, and we’re sorry to take away their flexibility. But our hands are tied. Making matters worse, a California appeals court ruled in September that business owners can now be held personally liable for certain violations.

Ask any human resources consultant what employees want in the workplace and their answer is likely to include: respect, trust, recognition, autonomy and flexibility. Unfortunately, California’s labor laws and regulations are making it increasingly difficult for businesses to provide these things.

Lawmakers defeated two bills this year that would have given employers the right to fix problems before PAGA suits could be filed. The Family Business Assn. continues to search for solutions.

In the meantime, I encourage state legislators to come by any of my company’s locations, from Merced to Redding, and talk to employees who now can’t eat lunch with their friends or leave early to go to a doctor’s appointment.

Surely this isn’t what the authors of the Private Attorneys General Act had in mind.

Ken Monroe is the chairman of the Family Business Assn. of California and the president of Holt of California.

Family businesses celebrate milestone anniversaries

While family businesses are the bedrock of California’s economy and its communities, keeping a business going for decades is extremely difficult. Studies show that only 30 percent of family businesses survive into the second generation, 12 percent to the third, and only 3 percent to the fourth generation and beyond.

But in 2018, eight family businesses that are members of the Family Business Association of California celebrated milestone anniversaries, demonstrating that despite the difficulties of running a successful business in California well-run companies can thrive for generations, said FBA Executive Director Robert Rivinius.

“This year’s list of anniversaries includes a wide range of companies, including two that marked their 100thyear in business,” Rivinius said. “The families who have these businesses growing for 50 year or more deserve recognition for their hard work and their ability to navigate the state’s difficult tax and regulatory regime.”

Profiles of five of the companies can be found on the FBA website: Shubert’s, Lund, Pini, Lippow, Jim Dobbas

The companies are:

Gorrill Ranch, Durham, was founded in 1918 by Ralph Gorrill, an engineer who was part of the team building what became U.S. 99. He purchased 2,400 acres along Butte Creek from the Leland Stanford estate. Teaming up with a colleague, Gorrill learned the rice industry and today the ranch is a small but prominent grower of rice and orchard crops. The ranch is now run by the fourth generation of family members. http://gorrillranch.com/our-story

Pini Hardware, Novato, was also founded in 1918, by a Swiss immigrant who opened a general store which within a decade became one of the largest employers in town. The Young family became involved in ownership in 1968 and today the store is operated by the third generation of the family. http://www.piniacehardware.com/about-pini/

Shubert’s Ice Cream and Candy, Chico, was founded in 1938 by Leonard C. Shubert, who left Montana at the age of 54 to find a location in California for an ice cream shop. When he drove into Chico, he knew he’d found his location and since then the shop has become a community institution. The fourth generation of the family now make ice cream and candies on the premises. https://shuberts.com/our-story/

Valley Truck and Tractor,Yuba City, was established in 1948 and today is the leading John Deere dealer in Northern California. https://www.valleytruckandtractor.com/about-valley-truck-tractor-yuba-city-chico-ca–info

Lippow Development, Martinez, was officially formed in 1948 – 44 years after Leo Lippow arrived in the United States as a penniless immigrant. Now run by the third generation of the family, the company owns and operates a diverse portfolio of commercial and industrial properties in California and Arizona.  https://www.lippow.com/about

Lund Construction, North Highlands, was founded 1958 by George and Alta Lund out of their garage. Now in their third generation, the company specializes in pre-construction, earthmoving, and pipeline services. https://www.lundconst.com/company/

Vanella Farms, Chico, began in 1968 when 23-year-old Bob Vanella purchased his first almond huller. Today, the company grows and processes almonds, walnuts and other crops on 3,000 acres and is a wholesaler that sells nuts to customers around the world. https://vanellafarms.weebly.com/about.html

Jim Dobbas, Inc., Newcastle, began its heavy equipment contracting business in 1968 and today specializes in emergency and derailment response services for class 1 railroads. The company is now run by the second generation of the family. http://www.jimdobbasinc.com/about/company-overview

Rivinius noted that the state’s 1.4 million family businesses employ 7 million people and tend to pay their employees better, train them better, and provide more generous benefits than nonfamily companies.

About the Family Business Association of California (FBA): Founded in 2012, the Family Business Association of California is the only organization working exclusively at the Capitol to educate lawmakers and regulators about the importance of family businesses to the state’s economy and to their communities – and to advocate positions on legislation and regulations. For more information, visit www.myfba.org.

Family Business Assn. Presents Its First Outstanding Legislator Award to Adam Gray

Asm. Adam Gray, right, receiving FBA award from legislative advocate Dennis Albiani at FBA’s Annual Meeting of Members

The Family Business Association of California, the only organization advocating exclusively for California’s thousands of family businesses, has awarded its first Outstanding Legislator Award to Assembly Member Adam C. Gray, D-Merced, for his record on legislation crucial to family businesses during the recently concluded session.

The award was presented at FBA’s Annual Meeting of Members this month in Sacramento.

“Gray is a member of the influential New Democrats caucus – lawmakers who are committed to a pragmatic approach that promotes the interests of hard-working Californians alienated by the extreme partisanship of both the left and the right,” said FBA Executive Director Robert Rivinius.

“He had a 100 percent voting record on FBA’s key bills this session and played an influential role in advancing business-friendly bills and amending or blocking bills that would have harmed family businesses. That’s not surprising since he comes from a family business background.”

Gray’s grandfather, Ernest Denault, established Merced Dairy Supply to serve the Central Valley’s growing dairy industry and the company continued to thrive under Gray’s father, Robert. In fact, Adam Gray’s first job was washing storage barrels and loading feed bags for the family business.

After graduating from UC Santa Barbara, Gray went to work for then-Assembly Member Dennis Cardoza, focusing on agricultural issues and later owned a small public affairs and communications firm while also serving as a lecturer at UC Merced. He was elected to the Assembly in November 2012.