The Growing Wage Gap

In June, median annual household income rose to $52,100 from its recent inflation-adjusted trough of $50,700 in August 2011. Despite this improvement, it is still $2,400 lower – a 4.4% drop – than in June 2009, when the last recession ended.

This has important implications for investors, given that consumer spending represents about 70% of our economic activity. When income is falling, people spend less, so investments that rely on consumer spending will be fighting some difficult headwinds.

However, it’s more complicated than that. The median income figure does not show the growing gap between people at upper income ranges and everyone else. Average nominal wages for the bottom quintile (one-fifth) have increased 3% since February 2010; however when prices are taken into account, real wages for this group have actually fallen 1.4% over this period. At the same time, real wages for the top quintile have moved higher, rising 1.8% over the same period.

This is one reason that BWFA considers not only the general state of the economy when selecting investments, but also which consumer segments can afford to buy what. This is particularly important when analyzing companies selling consumer staples and items considered discretionary purchases for consumers. As an example, shares of Nordstrom have returned nearly four times those of Wal-Mart since the great recession began.

There’s another factor to consider, too. A major contributor to the gap in income has been the growing divergence of labor productivity and hourly wages. In other words, workers are becoming more efficient, but they are not being paid fully for their efficiency. In fact, the gap is at its highest since World War II.

This trend is holding down workers’ income, which does not help an economic recovery. But on a positive note, many economists believe that the relative decline in the cost of labor is making U.S. manufacturers more competitive globally—a major positive. BWFA looks at a company’s cost-competitiveness in making a decision about it as an investment prospect, just as we analyze whether it is selling products that consumers want and are able to purchase.