Wages

0

By LARRY KANTER

Senior Reporter

Squeezed by increasingly tight labor markets, local employers are boosting their wages by the highest margins since the 1980s leading to corresponding price increases for many retail goods and services.

Thirty-five percent of Southern California firms increased their labor compensation in the second quarter, the largest incidence of wage gains since 1988, according to a new study by Wells Fargo & Co. and the National Federation of Independent Business.

At the same time, 22 percent of California companies reported that they raised average selling prices in the second quarter of 1998, compared with just 13 percent in the first quarter, according to the same study.

“Tight labor markets have begun to fuel a pick-up in wages,” said Gary Schlossberg, an economist with Wells Fargo. “The wage pressures are translating into higher prices in the service industries.”

Business services, entertainment and housing are among the sectors experiencing the most price inflation. But many L.A. retailers are sitting this one out unable to raise prices because of low inflation and inexpensive imports streaming in from Asia.

In some cases, this is forcing local manufacturers to deduct the higher labor costs straight from their bottom lines.

Francisco Pineda, president of South Central L.A. furniture manufacturing firm Cisco Bros. Inc., has seen his labor costs rise steadily for the past year or so and expects the added expenses to shave as much as 3 percent off his profit margin.

“In a way, it’s nice that our people are making more money,” he said. “But the question is, is the consumer willing to pay for it?”

Probably not, said Richard Giss, a retail consultant with Deloitte & Touche LLP.

“Retailers are doing everything possible to hold the line,” said Giss. “Today’s consumer is very cost conscious and price savvy. There is a real negative impact on sales if you raise prices right now.”

Lonnie Kane, president of Karen Kane Inc., a Los Angeles-based manufacturer of women’s wear, expects the higher labor costs to shave between 1 percent and 2 percent from his company’s bottom line.

“It’s not something that can be easily absorbed,” said Kane, who has 250 employees and posted sales of about $70 million last year. “The price for every job classification is going up.”

Kane is attempting to offset higher employment costs by boosting productivity, primarily by adding new technology and creating more-efficient production systems.

Has Kane tried asking his retailers, primarily specialty shops and better department stores, to accept a higher wholesale price?

“That’s a conversation that never happens,” Kane said.

But despite the difficulties being experienced by Kane and other manufacturers, the growing economy and the subsequent wage pressures are beginning to push up the prices of many goods and services in Los Angeles especially in areas of the economy not affected by foreign trade.

The median home price in L.A. County, for example, was $186,580 in May 1998 compared with $172,920 in May last year a jump of about 8 percent, according to the California Association of Realtors. The average monthly rent for a two-bedroom apartment in L.A. County went from $724 in January 1997 to $780 in January this year, according to the Economic Development Corp. of L.A. County.

According to the U.S. Bureau of Labor Statistics, the cost of food in Los Angeles rose 3.6 percent between May 1997 and May 1998. Over the same period, the price of housing rose 2.2 percent and medical costs climbed 1.6 percent.

Transportation costs in L.A. also are edging up slightly, with the average annual cost of owning and operating a pair of vehicles rising from about $7,300 in 1997 to almost $7,800 this year, according to Runzheimer International, a Rochester, Wisc.-based consulting firm.

The average daily rate for an L.A. hotel room for the first four months of 1998, meanwhile, was $110.50, up 9.4 percent from the same period a year ago. And even the cost of seeing a first-run movie in L.A. is edging up from $7.50 in 1997 to $7.85 this year, according to the EDC.

Whether those price increases constitute the onset of a new inflationary period is a matter of debate.

The price hikes could be a one-time event, a brief period of catch-up as the California economy which emerged later from the recession than the rest of the nation finally picks up momentum, said William C. Dunkelberg, chief economist of the National Federation of Independent Business.

Thirty-seven percent of California firms increased labor compensation in the second quarter, compared to just 31 percent in the rest of the country, Dunkelberg pointed out. Nationally, only 3 percent of firms raised prices, compared with 22 percent in California.

“The California economy has been lagging for awhile,” he said. “Suddenly, the labor markets are getting a lot tighter. California finally seems to have caught up with the U.S. economy.”

Others, however, are not quite so sanguine. Jack Kyser, chief economist of the EDC, said he is particularly concerned about the effect the uptick in home prices and apartment rental rates could have on inflation.

“Sooner or later, that’s going to show up in inflation numbers,” he said. “The Fed is right to be concerned.”

The Federal Reserve last week again left short-term interest rates unchanged, as inflationary fears gave way to concerns that the U.S. economy may be slowing down as a result of the Asian crisis and the strike at General Motors Corp.

Whatever is happening with prices, there is little question that the tightening labor market is leading to a bump in wages. Unemployment in Los Angeles County is running at 6.3 percent, compared with more than 11 percent in 1993. Employment is rising by 2.8 percent a year, with the L.A. County economy adding 108,000 new jobs annually, according to the EDC.

And that’s driving wages up. Average hourly wages are rising in most industry categories, according to the state Employment Development Department. The hikes are especially notable in industries that constitute the backbone of the L.A. economy.

In motion picture production, for example, the average hourly wage rose from $31.45 in May 1997 to $35.16 in May this year. For L.A. retail workers, the average hourly wage went from $10.77 to $11.08 over the same period. In the apparel industry, the hourly wage rate jumped from $7.80 to $8.16; in electronic components manufacturing, the average hourly wage went from $12.88 to $13.91.

Overall, state payroll taxes have risen between 4 percent and 5 percent over the past year, said Ted Gibson, chief economist of California Department of Finance.

And that’s beginning to take a toll on local manufacturers, who increasingly find themselves between a rock and a hard place, with shrinking profit margins but no ability to raise prices, even slightly.

“Right now, the only thing we’re doing is trying to get more efficient,” said Pineda of Cisco Bros. “Hopefully, that will compensate for the bottom line. If not, there is not really any choice but to pass the costs on to customers.”

Good luck doing that, said Gibson of the state Department of Finance.

“With respect to the goods sector of the economy, the international competition is intense,” Gibson said. “Businesses are seeing rising costs and profits are being squeezed. But the market will not let them have a price increase.”

No posts to display