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The missing pay hikes

Wage gains are expected to be modest as employers use bonuses, contractors to curb costs.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Signs of a fairly competitive job market are everywhere, unless you're looking for a big raise.

Employers are working hard to keep a lid on wage increases - and to a large extent they're succeeding - even though the unemployment rate of 4.4 percent is the lowest it's been in more than five years. For those with college degrees, the unemployment rate of 1.9 percent is not far above the lowest reading since the Labor Department started tracking those stats back in 1992.

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This quiz is adapted from Are You Paid What You're Worth?, by Michael O'Malley (Broadway Books, $15).

And even for those without high school degrees, the unemployment rate stands at 5.8 percent, tied for the lowest on record. Outside of some battered sectors such as the auto industry, layoffs are dropping as well.

Job cut announcements have hit the lowest level since 2000, according to the survey by outplacement firm Challenger Gray & Christmas, dropping 19 percent through the first 11 months of the year. 2006 is poised to have less than 1 million job cut announcements, the first time that's happened since 2000.

But Tuesday's government report on productivity and labor costs showed that hourly wages rose 4.3 percent in the third quarter from a year earlier, the lowest gain so far this year, and well below the 6.7 to 8 percent gains from 2000.

That might be good news if you're an employer trying to manage labor costs, or an economist worried that higher wages could send people shopping, sparking price increases that could push the Federal Reserve to raise interest rates again. But it's not good news for the typical worker's take-home pay.

"I'm befuddled. I would have expected to see larger increases too, but I would have expected to see them in 2006 as well," said Joe Kilmartin, director of compensation at Salary.com, a company that tracks pay and related issues for employers and workers.

His group's research shows employers are planning modest increases for 2007 - raises of about 3.8 percent to 4.0 percent, about 0.1 percentage point better than this year.

In a survey, Salary.com also found that about two-thirds of employers expected raises next year to just match this year's, about a quarter expect bigger pay hikes and some 5 percent are expecting smaller increases.

Other surveys suggest similar gains for 2007. Hewitt Associates, a human resources firm, forecasts base salary increases of 3.7 percent next year, the highest in five years but only a modest increase from this year's 3.6 percent. And Mercer Human Resource Consulting also is forecasting a 3.7 percent pay increase next year, the same as it saw in 2006.

One way employers are holding the line is by using bonuses and other variable pay programs, rather than raising base wages, to try to attract and keep employees without forcing costs higher. That's because companies are trying to stay lean in case of a slowdown in business, or a recession.

"The real action is not in base pay, it's in variable pay," said Steve Gross, a senior consultant for Mercer. "Companies are trying to use cash bonuses more and more. They're hesitant about raising fixed costs more than necessary."

Salary.com's Kilmartin said about 80 percent of employers surveyed now use bonuses as a part of their compensation package, up from only about 50 percent five years ago.

Employers are also making greater use of outside contractors, who might not show up on the company's budget for wages, or in some government pay and employee estimates.

Economists say the growth of outside contractors is one of the reasons the Labor Department's survey of households keeps showing stronger job growth than its separate survey of employers, which produces the more widely followed monthly payroll number.

The department's last payroll survey found employers added just 92,000 jobs in October, leaving job growth at just under 2 million for the last 12 months. But the department's separate survey of households, used to generate the unemployment rate, found 437,000 new jobs in October, and a 2.7 million rise in payrolls over the last 12 months.

Economists say payrolls probably grew by 105,000 last month but that the unemployment rate most likely edged up to 4.5 percent from 4.4 percent in October, according to a survey by Briefing.com. The government's November job report is due Friday morning.

And the economists aren't expecting to see wages accelerate. The average hourly wage is forecast to post a 0.3 percent month-over-month increase, actually a bit less than the 0.4 percent rise in October.

"We're looking at [annual] wage growth of 4 percent for all of 2006, and a little over 3 percent in 2007," said Gus Faucher, director of macroeconomics at Moody's Economy.com.

But Faucher is projecting more modest wage gains next year as the economy slows and unemployment nears 5 percent. He said strong corporate earnings growth and modest wage growth aren't likely to continue forever if unemployment stays low - eventually it will put more pressure on wages.

"Normally we think productivity gains end up in workers' wages. But if you look at corporate profits, it's businesses that have been benefiting," he said. There's got to be a reversal at some point."

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