Energy Costs Cool, but Impact on Wages Likely to Hold Steady

By Mark Jr.

Oct. 22, 2006

F the moment, Americans are enjoying a respite from gasoline prices that exceeded $3 per gallon during a blistering summer. Costs at the pump have declined to an average of about $2.26, but the relief is only relative.

Three years ago, that price would have seemed like a stiff increase from the $1.50 average would have seemed like a stiff increase from the $1.50 average—and it may be going up again soon now that the Organization of the Petroleum Exporting Countries has decided to cut production by 1.2 million barrels per day. This inexorable rise in energy costs has become woven into the U.S. economy.

The primary effect on workers is that they have less money for life’s necessities. And even though gas prices are decreasing, they’re still taking a big bite out of employees’ wallets. At some point, businesses might be forced to make up those differences or face the loss of workers who can no longer afford the commute. Or energy might become so costly that businesses can’t afford the workers—and start laying them off.

It hasn’t reached that point yet, says Harold McGraw III, CEO of McGraw-Hill Cos. and chairman of the Business Roundtable, an association of 160 chief executives.

“You’re going to have to see energy prices a lot higher and more sustained at that level to really influence employment,” McGraw says. Still, he adds, “we’re very concerned about the cost of living expenses that the American worker is enduring.”

In a statement accompanying the National Association of Manufacturers’ Labor Day report, president John Engler asserts that because energy prices have increased 23 percent over the past year, real wages have fallen by 0.5 percent.

A July study by the Congressional Budget Office makes a similar argument. “Real household income has grown less rapidly in the past few years than it would have if energy prices had not risen substantially,” it states. “Households are spending much more on energy goods and services today than they were in 2003.”

The declining income could discourage potential workers who might be considering starting a job hunt.

“There will be some people on the margin who won’t go into the labor force,” says William Helkie, a senior advisor at the Energy Information Administration. “You expect to stay at full employment, but full employment will be lower than you would otherwise expect”

The Economic Policy Institute says that monthly employment increased by an average 190,000 per month in 2005. In the first quarter of this year, that number dropped to 176,000, and in the second quarter it fell to 112,000.

In addition to keeping people out of the labor market, higher energy prices are now starting to take a toll on companies. The Business Roundtable’s third-quarter economic outlook survey came in at 82.4, a decline from 98.6 in the second quarter.

The group surveyed 109 CEOs between August 25 and September 8. A reading above 50 indicates that the executives forecast economic expansion. The business leaders are assuming 3 percent economic growth in 2006.

The forecast is tempered because companies are having varying degrees of success in coping with higher energy prices. The survey indicated that 23 percent were unable to pass any of the increase along to consumers and absorbed all of the costs.

“In the third quarter, we’re starting to see the effects of higher interest rates and higher energy prices on business growth,” McGraw says.

Even though future economic prospects have moderated, the immediate gas price crunch has abated. Still, companies that want to retain their top employees might want to help them cope with the underlying upward trend in prices.

Doing so will help them stand out as an attractive place to work—an aura that could reap benefits in a tighter job market. If companies are chasing after a smaller pool of workers, they will have more leverage to make demands.

“They’re going to be a lot more vocal about employers helping them with fuel prices,” says Melanie Holmes, vice president of corporate affairs at Manpower Inc. “Companies are going to have to work much harder to be employers of choice in their community.”

Among the programs that some companies implemented during the summer price hike were ride sharing, mass transit discounts, mileage reimbursement, gasoline subsidies, flexible time schedules and incentives to carpool or ride a bicycle to work.

One of the most popular tactics was to allow more employees to telecommute. This phenomenon is growing based on a variety of factors, but recently gas prices have become a primary cause.

Yoh, a technology employment and outsourcing firm, surveyed 198 human resources managers at June’s Society for Human Resource Management annual conference and found that 81 percent of hiring managers have policies that allow employees to work from a remote location.

The poll also showed that 67 percent believe that telecommuting will grow during the next two years. A Manpower poll released July 11, when gas prices were nearing their highest point, found that 6 percent of 900 employees said their companies were implementing programs, including telecommuting, to help employees with energy costs.

Of course, the flip side of the Manpower poll means that 94 percent surveyed said their companies were not responding to rising prices at the pump.

“We tend not to do things until we really feel the pain,” Holmes says.

Even employers that want to help are hesitant to do it explicitly through salary increases that are tied to rising gas prices. For one thing, the volatile energy market may do what it’s done this fall-take a downward turn.

“What do they do, get that money back?” says Randy Gartz, vice president of permanent placement services in the central U.S. for Robert Half International.

Besides, the idea that workers should turn to their company for help has not yet been ingrained in the mind-set of the U.S. workforce.

“People predominantly don’t expect their employers to cover the price of gas,” Gartz says.

He noted that even during the height of the summer driving season, people interviewing for jobs didn’t list energy costs as their No. 1 concern. They were likely to look for a new job for traditional reasons, such as the desire to find a new challenge, make more money or move to a different part of the country.

But if gas prices spike again, companies may have employees over a barrel when it comes to mobility. “If people can’t afford to buy gas, they can’t afford to quit their job,” Holmes says.

When the next jump in prices will occur is anyone’s guess. So far this fall, luck has been on the side of the consumer. The hurricane season is passing without a major storm and the U.S. and Iran have addressed their differences through diplomacy rather than war. If the winter is warmer than normal, that will ease pressure on natural gas supplies.

But a storm could blow up or Iran could strike a provocative posture. And OPEC stands ready to reduce supplies again if the price per barrel doesn’t rise to the level it desires.

This fall, businesses will be watching interest rates, energy and home costs.

“The wild card is energy prices,” McGraw says.

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