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How the internet keeps your paycheck from getting much bigger

MarketWatch logo MarketWatch 11/3/2017 Jeffry Bartash

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Are smartphones, computers and the internet responsible for your meager pay raises each year? One investment pro thinks so.

Brad Neuman, an investment strategist at New York-based Alger, argues that old economic models on how wages respond to labor shortages are outdated. No longer does pay rise rapidly as it did in the past, he suggests, when the unemployment rate falls to very low levels as it has recently.

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The reason: The internet age has leveled the playing field for customers. They can use technology to find the best prices and buy products from almost any place in the world. That keeps pressure on companies to keep prices low — and what they pay workers, too. Labor is the single biggest expense for most companies.

“Classical economic theories are not keeping up with the fast pace of technology change,” Neuman said in an interview. “Firms just don’t have the same pricing power anymore because consumers can use technology to shop.”

The global marketplace also extends to employment.

a close up of a map© Provided by Dow Jones & Company, Inc.

American workers and firms are now competing with rivals from all over the world. U.S. companies aren’t going to pay employees a premium domestically if labor costs are much cheaper elsewhere.

“We usually just look at wages inside our borders, but Americans are now competing with workers abroad,” said Neuman, whose investment firm manages $20 billion.

What about workers in service-oriented businesses such as retail stores, restaurants and beauty salons who don’t compete directly with foreigners? Neuman says their paychecks are unlikely to get much of a bump if their customers are also constrained in what they can spend.

The slow though gradual rise in wages has confounded many economists and senior officials at the Federal Reserve. Wages rose just 2.4% in the 12 months ended in October even as the unemployment rate dropped to a nearly 17-year of 4.1%.

Normally wages growth 3% to 4% a year in good times.

Clearly, technology has made it easier for consumers to check prices and find the best deals. That’s one of the forces depressing wage growth. Many recent studies also point to weak productivity growth, low inflation and a more globalized economy as other headwinds.

More recently, companies have focused on providing more attractive benefits in lieu of higher wages as a means to recruit or retain workers.

If Neuman is right, the era of slow wage growth might be the new normal.

Jeffry Bartash is a reporter for MarketWatch in Washington.

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