Goldman Sachs Analysis Shows Just How Low American's Wages Are

by: APAC Investment News


Goldman Sachs found that about half of all Americans earn $20 or less per hour.

For the average family, both parents would need to earn nearly $20 each just to meet all their basic needs.

Low wages could thus present a threat to consumer consumption.

Low wages could also force the government to spend more on social welfare and/or increase social instability.

Despite the fact that the U.S. economy is growing at a healthy clip and hiring is up, nearly 80% of Americans are worried about the economy, and the labor market itself has remained stagnant in many aspects. Now, a data analysis conducted by Goldman Sachs (NYSE:GS) has suggested that average wages may be lower than most people believe.

Goldman Sachs analyzed data compiled by the Bureau of Labor Statistics and found that over half of all Americans earns less than $20 an hour, while nearly 20% earn less than $12 an hour. These low wages could pose a threat for the economy and investors as they could lead to restrained consumption, force the government to spend more on social welfare, and could potentially lead to increased social instability.

Average Incomes Lower Than Many Likely Believe

If you head to the CIA World Factbook and dig up the statistics for the United States, you'll find that America enjoys an annual per capita income of $52,800 (2013 est.). That certainly sounds like a healthy middle class wage and breaks out to roughly $25 an hour.

Per capita income is sometimes incorrectly thought of as an accurate measure of how much the average person is earning. Of course, anyone who is familiar with statistics would be able to tell you that per capita income can skew the picture because the top few earners could potentially inflate numbers, at least from the perspective of the average earner.

The data reported by Goldman Sachs suggests that most Americans are earning substantially less than $25 an hour. Indeed, more than half are earning less than $20 an hour, and nearly 20% of Americans are earning less than $12.50 an hour. This suggests that the average American is earning far less than the national per capita income.

Average Wages Barely Enough To Live

It's already well-known that the minimum wage in the United States is woefully inadequate for supporting one's self, let alone a family. MIT has put together an interesting living wage calculator to illustrate the costs of supporting a family in a given location. The living wage was set at minimal living costs, meaning how much a family would have to spend just to survive.

A living wage for a 2 parent, 2 child household in Houston (a relatively cheap American city), for example, comes in at nearly $18 an hour. Given Goldman Sachs' data, this means that the average American earning roughly $20 an hour would be left with precious little after paying their minimal living costs.

There are, of course, many interesting social justice issues tied up in questions of living wages, but for us investors it's important to consider the impacts of wages on consumption and national finances. Both of these factors are essential for the economy as a whole and thus investors.

If nearly half of Americans are earning less than a living wage, then these individuals will have little to no discretionary income to spend. No new cars, no new houses, fewer toys and gadgets, and almost certainly no investment portfolio. This means less demand and that's not just a loss for poor families (though obviously it is), but also for companies, property owners and investors.

Consumption Threatened By Stagnant Wages

Consider this, if more people were investing in stocks, rising demand for stocks would raise prices. Now, as investing itself becomes concentrated in the hands of fewer and fewer big players, markets themselves will likely grow more volatile. Why? Prices will be subject to the whims of fewer and fewer people. The same could prove to be true of property markets and every other type of market.

And consumption levels could even begin declining. McDonald's (NYSE:MCD) has seen its revenues and sales dropping, while Wal-Mart (NYSE:WMT) saw declining sales in 7 out of its last 8 quarters. Consumer confidence remains low, fewer people are going to college due to high prices, (going to college is, after all, a form of consumption), and retail sales have stalled out.

Stagnant wages may not be the sole cause of these conditions, but almost certainly they've had an impact. As wages remain stagnant, the impact will likely only grow over time and given the twin forces of globalization and automation, wages likely will remain stagnant for the foreseeable future, at the very least.

Other Factors Can't Be Ignored

Consumption is perhaps the first factor analysts turn to when examining the impact of wages, but it's not the only factor to consider. When people have trouble meeting their needs on their own they must often turn to the government.

During and following the Great Recession, the federal government was forced to spend record amounts on unemployment insurance. In 2012 alone, the government spent $94 billion on unemployment.

The money spent on food stamps has also been steadily increasing as enrolment has continued to explode. In 2009, a total of 15.2 million households participated in the SNAP program, but by 2013 it had exploded to over 23 million. In 2005, the federal government spent just over $30 billion on SNAP, but that rose to nearly $54 billion by 2009 and just under $80 billion by 2013.

The more money spent on social welfare, the higher taxes will have to be, or the more money the government will have to cut from other problems, or the more debt that will have to be added to the ledgers as the can is kicked down the road for future generations to pay.

Of course, the government could always cut social spending, but that could increase the risk of social instability. Consider this, the Arab Spring that swept through the Middle East was arguably not rooted in democracy and freedom, but instead high unemployment rates that often exceeded 20% or more.

When people don't have a job they can't provide for themselves, creating dissatisfaction and often forcing people to resort to desperate means to meet their ends. At the same time, people who don't have to work every day simply have more time (as well as desire) to participate in social movements.

Labor Market Remains A Threat To The Economy

Despite the considerable growth of the economy, many middle and working class Americans are continuing to struggle. Wage growth has remained stagnant, barely able to keep pace with inflation at 2% per year. Long-term unemployment remains at historically high levels. If conditions don't improve in the near future, the economy may not be able to sustain growth.

For investors, businesses, public policy makers, and everyone else, the labor market should be a top priority. The United States may be able to shrug off weakness in foreign economies owing to its lack of dependence on exports, but if domestic consumption starts to decline, the economy will almost certainly sink.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.