Long-awaited sign of wage gains came too late to save Democrats

Americans went to the polls this week amid signs that the income gains they've been hankering for may finally be starting to materialize. It was too little and too late to help Barack Obama's Democrats.

Wages and salaries paid to civilian workers climbed 2.1 percent in the third quarter from the same time last year, the most since the first three months of 2009, Labor Department data showed last week.

The advance failed to pay dividends at the polls for Democrats, as voter perceptions of the economy tend to be locked in about six months before Election Day, according to political analysts. In addition, the wage growth remains short of that seen during past economic expansions, making it tough to detect progress.

"The problem for this whole theme is that it's at the beginning stages," said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York, referring to the increase in pay. "It's really only been over the last few months where it's solidified," said Porcelli, the best forecaster of consumer spending over the past two years, according to data compiled by Bloomberg.

Civilian wages and salaries rose 0.8 percent in the third quarter from the prior three months, the biggest gain since mid-2008, the Labor Department's employment cost index showed last week. That followed a 0.6 percent advance from April through June.

Smaller Gains

The increase over the past year remains well short of the 3.4 percent gain in the year ended December 2007, just as the worst recession in the post-World War II era was starting.

"We're starting to see the modest first glimmers of wage growth accelerating, but wage growth is still low," said Guy Berger, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut. "The fact that your paycheck is getting a tiny bit bigger rather than shrinking like it did in the first few years of the recovery is a meaningful change, but it's not very much so far. You're not going to be particularly happy given how much of a decline you saw in the prior few years."

Seven of 10 voters casting ballots in this week's midterm elections rated economic conditions as poor, preliminary exit polls showed.

"Perceptions do lag behind reality," said Matthew Dickinson, a political science professor at Middlebury College, in Middlebury, Vermont. "They tend to lag even more when the economy improves so incrementally that it doesn't permeate the consciousness" of voters, he said.

Republicans were successful in making it a referendum about the competence of the president's party in handling a wide array of issues, including the economy, terrorism, foreign policy and even the health risk posed by the Ebola virus, Dickinson said.

Voters by 65-31 percent said the country is on the wrong track. That's 12 points more negative than two years ago and the second-gloomiest exit-poll reading since 1990, trailing only the 2008 election, the numbers showed. Half of voters expect life to be worse for the next generation.

Another reason the message that wages are picking up isn't gaining traction is that not all measures are pointing in the same direction. The Labor Department's gauge of average hourly earnings, issued with the monthly jobs report, rose 2 percent in the 12 months ended in September, about where it's been since late 2009.

Different Measures

Some economists say the employment-cost index is a superior measure because it aggregates pay by tracking the same type of job over time. By contrast, the average earnings figures lump all jobs together, making it more difficult to detect gains within similar occupations.

"I love the ECI, I'm a big fan," Berger said. "I'm a little more inclined to think that there's a pickup in wage growth, but it's not corroborated by average hourly earnings. You need some sort of additional data point to be really convinced this isn't just noise."

Wages failed to pick up sooner because companies didn't cut pay during the recession in response to the slump in sales, said Laura Rosner, a U.S. economist at BNP Paribas in New York and a former New York Fed researcher. The jobless rate, which was at a six-year low of 5.9 percent in September, has now declined enough -- and economic growth strengthened enough -- to start spurring bigger increases in pay, something over which politicians had little control, she said.

"The fact that it's taken so long for wages to rise is related to dissatisfaction with the economy," said Rosner. "The lack of wage growth has more to do with the way businesses responded to the shock of the financial crisis than it does with any kind of political actions."