Goldman Sachs Warns That Rising Wages Could Cut Into Corporate Profits. The Horror!

Workers at a McDonalds
Pay them more?! Lucas Jackson/Reuters

Corporate executives and Wall Street types come up with all sorts of reasons why it’s supposedly dangerous to let the unemployment rate drop too low. They talk about how the economy might “overheat,” leading to a dreaded bout of inflation. They may talk about “worker shortages” that make it hard to find the right talent.

But in the end, most of this is just verbiage meant to skirt the real concern: Companies are worried that if unemployment falls far enough, they’ll have to pay workers more, and that will cut into their profits. With the official jobless rate at 4 percent, that’s already beginning to happen at some companies, the Wall Street Journal reports today. Ten percent of companies in the S&P 500 have claimed that higher wages hurt their earnings in the first quarter, it notes. Goldman Sachs is predicting that “every percentage-point increase in labor-cost inflation will drag down earnings of companies in the S&P 500 by 0.8%.”

This, of course, is considered a nightmare. “At the end of the day, I haven’t heard this many CEOs talk about shortages in skilled labor and wage increases to attract talent in a long time—in at least a decade,” one money manager told the paper.

Keep that quote in mind the next time you read an overwrought article about ill-defined “worker shortages.” C-suiters have created an entire coded language that lets them spin a strong labor market as a threat to the economy, when in reality it mostly just poses a marginal threat to their bottom line. A CEO can go on CNBC and say that his company is coping with a “labor shortage” without seeming like a self-interested capitalist, when in reality, he’s just trying to explain why a healthy economy is bad for his shareholders.

In fairness, execs are right to be concerned that a good economy might give workers more leverage to demand higher pay. Labor’s share of the national income tends to rise as economic expansions heat up and hit their peak. For example, employees’ share of the economy hit its highest point in decades during the torrid, final days of the dotcom era.

A chart of labor share of the economy

Of course, there are other reasons that investors sometimes get spooked by low unemployment. When employers have to raise wages, it does put pressure on consumer prices. While that may not actually be a bad thing for the economy—many would argue inflation has been too low for years—it does encourage our inflation-phobic Federal Reserve to increase interest rates, which can hurt stocks by slowing growth and making other investments look more appealing.

But again, inflation or the Fed’s reaction isn’t really the first-order concern for most people at the top of corporate org charts right now. Ultimately, their problem is that tight labor markets are, in fact, good for labor. That’s why they’re grumbling.