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http://www.hreonline.com/HRE/images/PeterCappelli106x106.jpgWondering About Wages

Searching for insight amidst the traditional sources of pay-increase data may not be the best way to determine where wages should be set.

Monday, July 15, 2013
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One of the hot topics around a table of HR people has traditionally been what their companies are going to give employees in the form of annual pay increases. It is hard to imagine now, given how low inflation has been over the past generation, but those conversations once had big consequences. When annual wage increases were in the double-digits because of inflation, it was common for similar employers to differ from each other in their pay packages by several percentage points.  

These days, it is easy to believe that there isn’t much variation in what companies are paying. Information from the standard sources such as the Conference Board and BNA, as well as consulting companies including Mercer, the Hay Group and Towers Watson, on what annual wage increases will be hasn’t changed much since the recession officially ended: It dropped down to 2 percent or less, then moved up to 2.5 percent, then has hovered between 2.5 percent and 3 percent.

But there are some reasons for thinking that those numbers may not be telling us everything that is interesting. The first reason is – obviously -- that they are averages, and an average tells us nothing about what the variance is across employers. The second is that those figures tend to reflect only what big companies are paying.

There is a special reason to be interested in what is happening to pay this year because there is now a pretty clear sense that a real economic recovery is under way in the labor market, not just the stock market, and the complaints from employers about hard-to-find skills are higher than ever.  

Given that as background, here is some data: The Bureau of Labor Statistics reports that, over the past year, wages have risen about 2.1 percent against an inflation increase of about 1.2 percent. It is growth, in real terms, but not much. We also cannot tell how much of that increase is due to a rise in other payments, such as overtime pay.

Other sources indicate large companies are expecting to pay about 3 percent more this year, which is a little higher than in the past, but not much different.

The folks at PayScale have some different numbers that are worth considering. Their data is based on what individuals report they are being paid right now. Overall, the figures for this past quarter suggest average wages are up about 2.5 percent at an annual rate, which is in line with most of the other figures.

What is interesting about their numbers, though, is that small employers (with fewer than 100 employees) are raising their pay considerably more: 4.1 percent more this quarter at an annual rate. Medium-size employers with 100 to 1,500 workers are paying slightly less than the average of 2.5 percent, and large companies with more than 1,500 employees are paying less still.  

We used to think big companies paid more, and that could still be true. But maybe potential candidates are more nervous about going to small companies for fear that they are more likely to fail. In other words, small companies are raising their pay because they have to do so to get the candidates they want. Another view is that, after squeezing employees for the past five years, public companies continue to squeeze workers because they can, while smaller companies -- which are typically private -- are now cutting them a break. In other words, they are raising pay because they want to.

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Other figures remind us that beneath the placid exterior of average increases lies a churning mass of specific figures. Increases this quarter in the San Francisco region are almost double those in many other regions; wage increases in oil and gas fell from a booming annual rate of increase of 6 percent last quarter to essentially flat this quarter; manufacturing wages did the reverse twist over the same period.

So the lesson here is that the average figures tell us little about what is going on in your industry and region.

Still, here are some figures of interest to everyone. Data from other sources suggest that wage increases in the United States are near the bottom of average figures for the industrialized world, right down there with Spain. Where are they booming? China, India, Brazil and Argentina. At least for managers, evidence is suggesting that wage levels in those countries are beginning to outstrip those in the United States.

Time to brush off that passport.

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School. His latest book is Why Good People Can't Get Jobs: The Skills Gap and What Companies Can Do About It.

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