Wages provide relief for workers facing payroll-tax shock

Bloomberg NewsJanuary 7, 2013 

— An improving job market is boosting wages and providing needed relief just as every American worker gets hit with a tax increase.

Hourly earnings climbed 0.3 percent on average in December for a second month, the biggest back-to-back increase since the economic recovery began in mid-2009, Labor Department figures showed Friday. Combined with a lengthening of the workweek, that brought the average weekly paycheck to $818.69, up 1.2 percent from October and the steepest two-month gain since February- March 2007, before the recession began.

The boost comes just as the fiscal pact passed by Congress last week lets the payroll tax used to pay for Social Security benefits rise to 2010 levels, reducing paychecks by $41.67 from someone earning $50,000 who is paid twice a month. The higher salaries, together with the lowest gasoline prices in almost a year, will provide a lift to household spending, which accounts for about 70 percent of the world’s largest economy.

“Let’s not be too quick to write off the American consumer,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. “Paychecks are a little healthier. The outlook for the consumer is probably a bit brighter than people think.”

Job and income gains may be one reason consumer confidence and spending held up the past few months as lawmakers struggled to avert $600 billion in sweeping tax increases and government spending cuts that were slated to take effect this year.

The Bloomberg Consumer Comfort Index rose to an eight-month high in the week ended Dec. 30. For the year, the index climbed 12.9 points, the biggest annual improvement since 1998. Americans earning $100,000 or more reported their most optimistic reading in more than two years.

Growing optimism may be one reason demand is holding up. Cars and light trucks sold at a 15.3 million annual rate in December to complete the best annual total since 2007, industry figures showed last week. Virtually all major automakers added shifts and jobs throughout 2012 to keep up.

“Workers are enjoying better income growth, which should further their ability to continue spending,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit. “The economy is really poised to accelerate as long as Washington is able to resolve the remaining issues” related to the debt limit and government spending cuts.

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