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How Stock Options Muddle The Relationship Among Wages, Corporate Profits and Inflation

  • Summary: Contrary to the general consensus that wage growth has been sluggish, the Commerce Department's Bureau of Economic Analysis (“BEA”) announced that labor income for the first half of 2006 rose by 1.3% ($95 billion). What was puzzling was that there was no corresponding growth in GDP (i.e., productivity) to accompany the wage growth. Ordinarily wage growth without accompanying productivity will translate to the bottom line as lower profits, but that does not seem to be the case here. Given the stock market’s strong performance during 2006’s first quarter, analysts are suggesting that the increased wages are probably a result of executives cashing in stock options during that period. If the increase in labor income is attributable to stock options, this would help explain why (according to polls) workers are dissatisfied with low wage growth, since stock options (as part of a compensation package) are more concentrated at the management level.
  • Comment on related stocks/ETFs: Figuring out true employee compensation has always been a frustration for analysts. With low wage growth there is speculation that workers (not on the options gravy train) have been withdrawing money from their home equity piggy-bank just to keep up with real inflation (which includes housing and energy – both excluded from the CPI). On Sep. 7, WSJ ran an article puzzling over wages and corporate profits both going up; they don't usually move in tandem. As noted there, executive incentives could be one answer to the conundrum. The slowing housing market could introduce wage pressure into the economy (see SeekingAlpha’s latest in a series of posts on the housing bubble).

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Source: Wage Growth is Not What it Appears to Be