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Despite wage increase headlines, early effects of tax reform hard to disentangle

The headlines continue to trickle in as companies respond to the new tax law: JPMorgan Chase & Co. is raising wages and adding 400 branches; Walt Disney Co. employees are getting $1,000 bonuses; CVS Health Corp. is raising its minimum wage for hourly employees to $11 an hour.

At Hostess Brands LLC, the snack cake maker whose products include Twinkies and Ho Hos, employees are getting $750 in cash bonuses and $500 in 401k contributions — along with a free pack of snacks each week for a year.

Those announcements will, no doubt, add more money to the workers' pockets, on top of the tax benefits most will be seeing from lower individual rates. But economists say it is not yet clear whether the headlines will have a major effect on the country's overall wage growth figures, which have been lackluster since the financial crisis.

For one, the 4.2 million U.S. workers that President Donald Trump said in a Feb. 11 tweet have benefited from those headlines make up a relatively small portion of the more than 160 million people in the U.S. civilian labor force. Many of those workers have also gotten one-time bonuses rather than a permanent wage increase.

If wages do pick up in the coming months, as many expect, economists say the gains will largely be driven by an unusually tight labor market, with a 4.1% unemployment rate putting pressure on businesses to raise wages as they compete for workers.

"I think the dominant issue … is really that labor markets are very tight, and firms are having a tough time keeping their best employees," said Timothy Duy, a University of Oregon economics professor.

On Feb. 2, the Employment Situation report for January showed wages rose at their fastest rate since 2009, helping spark fears from equity investors that inflation pressures are building and that the Federal Reserve may hike interest rates quicker than expected.

Catherine Barrera, chief economist at the online employment marketplace ZipRecruiter, said although the report could be a one-month blip, she expects the wage gains to continue in the coming months. She also said it will be difficult to fully disentangle the causes of rising wages, noting Walmart Inc.'s case is indicative of some of the pay pressures employers experienced before the tax law passed.

Walmart, whose wage announcement was followed by news of layoffs and closures, is increasing its minimum wage to $11 an hour and giving bonuses to employees, with a $1,000 maximum for those who have spent at least 20 years at the retailer. Walmart, though, had already been planning pay increases for several U.S. markets, and a top competitor, Target Corp., had said in September 2017 it was raising pay for its employees.

"This looks to me like labor market competition," Barrera said.

Supporters of the tax reform package say although its effects on nationwide wage data may be relatively muted in the near term, the announcements are early signs of the benefits workers will see. Brian Riedl, senior fellow at the Manhattan Institute, said the long-term benefits will come as companies invest more and more money in the U.S., with the capital investments helping boost lagging productivity levels and wages.

The recent announcements, he said, have been a "pleasant surprise" for workers' paychecks that indicate employers are feeling confident about the future.

Bret Swanson, visiting fellow at the American Enterprise Institute, pointed out that companies such as Apple Inc. are already beginning to announce commitments to expand their U.S. operations. He also pushed back against critics who are skeptical of the bonus announcements from companies, saying it is "difficult to look at any of this as anything but positive."

"I wouldn't completely dismiss them," Swanson said. "I think they are a legitimate way for firms to signal that they intend to reward their workforces as they look a little bit into the future."

Several surveys indicate employers are planning on wage increases in the coming months.

A National Federation of Independent Business survey from January, for example, found employers say finding qualified workers is now their most pressing concern and that a net of 24% of employers planned on increasing pay in the next three months. The figure has increased over the past two months "in response to tighter labor markets" and is now at its highest level since 1989, the NFIB survey says.

A January survey from the National Association for Business Economics also found 48% of the employers it surveyed said their wages and salaries rose in the past three months, and 58% expect they will bump up wages in the next three months.

That, economists say, is evidence that the traditional relationship between low unemployment and rising wages is holding up — even if the wage gains are taking a while to show up. Another indication, ZipRecruiter's Barrera said, is that wage gains are increasingly coming from those with lower-paying restaurant and retail jobs, which she said is a "promising sign" that the recovery is spreading to all groups.

Dean Baker, co-founder and senior economist at the liberal-leaning Center for Economic and Policy Research, agreed.

"When you get a tight labor market, it's disproportionately those at the bottom who are helped," Baker said. Still, he said, the benefits that companies are getting from tax reform will be ongoing, so they "shouldn't have any qualms" about permanent wage boosts. But that has not been the case for some, he said.

"I'm really struck by that," he said. "Obviously, they're reluctant to commit to higher pay."