PrefBlog

The New York Fed has released a Staff Report by Natalia Emanuel and Emma Harrington titled The Payoffs of Higher Pay: Labor Supply and Productivity Responses to a Voluntary Firm Minimum Wage:

What are the returns to firms of paying more? We study a Fortune 500 firm’s voluntary firm-wide $15/hour minimum wage, which affected some warehouses more than others. Using a continuous difference-in-differences design, we find that a $1/hour pay increase (5.5 percent) halves worker departures, reduces absenteeism by 18.6 percent, and increases productivity (boxes moved per hour) by 5.7 percent. These productivity gains fully defrayed increased labor costs, offsetting the firm’s incentive to mark down wages. We develop a simple model that connects efficiency-wage incentives and monopsony power, showing how these forces can counterbalance each other to keep wages closer to workers’ marginal revenues.

Yup. In most cases, sweating your labour is false economy.

Jobs, jobs, jobs!

US job growth was historically weak last year. And US job growth was significantly stronger than expected at the start of this year.

In the January jobs report released Wednesday – a Schrödinger’s cat of employment snapshots – the seemingly opposed dynamics both held true.

The US economy added an estimated 130,000 jobs last month, and the unemployment rate ticked down a tenth of a percentage point to 4.3%, according to new Bureau of Labor Statistics data.
…
Health care and social assistance drove the lion’s share of last month’s employment gains, with an estimated 123,500 jobs added.

That was followed by the 34,000 jobs gained in professional and business services, including employment services, administrative and other white-collar roles. Construction, likely helped by unseasonably warm weather at the start of the month, added 33,000 jobs.

Many other sectors, notably government (-42,000 jobs), either shed jobs or reported very weak gains.

… and …:

The Employment Cost Index, which measures changes in wages and benefits, rose 0.7% during the last three months of 2025, marking the slowest quarterly increase since 2021, BLS data showed.

The markets reacted a bit:

The Canadian dollar edged lower against its U.S. counterpart on Wednesday as stronger-than-expected U.S. ⁠jobs ​data reduced expectations for Federal Reserve interest rate cuts, offsetting higher oil prices.

The loonie was trading 0.1% lower at 1.3560 per U.S. dollar, or 73.75 U.S. cents, after moving in a range of 1.3505 to ​1.3618.
…
Canadian bond yields moved lower across a flatter curve. The 10-year was down 2.4 basis points at 3.338%, while the gap between it and the equivalent U.S. rate widened by 5.5 basis ​points to 83.8 basis points in favor of the U.S. note.

PerpetualDiscounts now yield 5.66%, equivalent to 7.36% interest at the standard conversion factor of 1.3x. Long corporates continue to yield 4.92% on 2026-2-11. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained steady at the 245bp reported February 4.

Sorry this is late!

I found the following claim by Jeff Sommer in the G&M to be of interest (bolding added by jiH):

In the course of the artificial intelligence boom, big tech companies like Nvidia, Microsoft, Alphabet, Amazon, Broadcom, Meta and Tesla have risen so much that the market has breached a long-standing legal threshold: It is no longer diversified, by the Securities and Exchange Commission’s traditional standard. The U.S. stock market has become more highly concentrated than it has been since the 1960s, and investors are taking greater risks than they may realize.

This might be correct, but it depends on interpretation. Maybe. Mr. Sommer did not actually specify the precise rule he’s looking at or just how the S&P breaches it. But anyway, according to Investment Company Act of 1940:

‘‘Diversified company’’ means a management company which meets the following requirements: At least 75 per centum of the value of its total assets is represented by cash and cash items (including receivables), Government securities, securities of other investment companies, and other securities for the purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 per centum of the value of the total assets of such management company and to not more than 10 per centum of the outstanding voting securities of such issuer.

Right now, both Nvidia and Apple comprise over 5% of the S&P 500, so maybe that’s the justification for the statement.

But on the other hand, only 75% of the value of the company has to meet this test. So one could argue that of the 7.18% of the S&P 500 represented by Nvidia, 5.00% can go in the 75% bucket, while the remaining 2.18% can go in the non-75% bucket and everything is hunky dory.

Apparently, though, this is not argued. In an earlier column (published in the NYT, but not in the G&M), Mr. Sommer writes:

I was aware of these numbers but didn’t connect them directly to the issue of portfolio diversification. A reader brought this problem to my immediate attention recently. Fidelity Investments had sent her and other fund shareholders a letter saying that since Nov. 10, two major index funds, Fidelity 500 and Fidelity Total Market, were operating as “nondiversified funds.” She wanted to know whether the funds had changed in an important way. Why weren’t they still diversified?

When I looked into it, I found that the funds themselves haven’t shifted their approach one iota. In an emailed statement, Fidelity said, “The benchmarks of those funds remain the same.” They are still carefully tracking the stock market, as they have since their inception.

Instead, what has changed is the U.S. stock market itself. It has become so top-heavy that index funds mirroring the overall market are breaching legal thresholds for diversification set by the Securities and Exchange Commission to protect investors. Fidelity was merely notifying its customers that it was making a legal adjustment in its funds acknowledging this shift — something, as I learned, that Vanguard, State Street, BlackRock and other companies with similar funds had already done in their own legal filings.
…
As Vanguard puts it in the prospectus of its Vanguard 500 Stock Index Fund, investors now need to be aware of “nondiversification risk.”

“Because the fund seeks to closely track the composition of the fund’s target index,” the prospectus says, “from time to time, more than 25 percent of the fund’s total assets may be invested in issuers representing more than 5 percent of the fund’s total assets due to an index rebalance or market movement, which would result in the fund being nondiversified under the Investment Company Act of 1940.”

According to the factsheet for Fidelity 500, at year end only three issues exceeded 5% of holdings: Nvidia, 7.74%; Apple, 6.86%; and Microsoft, 6.14%. Not 25%, but close enough that a little bit of legal caution is warranted!

Pikers. I can remember when Nortel was more than 25% of the TSX Index! Did we flinch? No. Did we diversify? No. As the man might say, those would be the actions of radical extreme left-wing communists and we scorned such timidity!

The New York Fed published SURVEY OF CONSUMER EXPECTATIONS:

January Survey: Earnings, Job Loss, and Job Finding Expectations Improve Modestly; Inflation Expectations Lower at Short-Term, Unchanged at Medium- and Longer-Term Horizons

• Median inflation expectations in January declined by 0.3 percentage point (ppt) to 3.1 percent at the one-year-ahead horizon and remained steady at 3.0 percent at the three-year and five-year-ahead horizons.
• Median one-year-ahead earnings growth expectations increased in January by 0.2 ppt to 2.7 percent. The increase was driven by those with a household income under $50,000.
• The mean perceived probability of losing one’s job in the next twelve months decreased by 0.4 ppt to 14.8 percent, remaining slightly above the trailing 12-month average of 14.6 percent. The mean perceived probability of finding a job in the next three months if one’s current job was lost increased by 2.5 ppts to 45.6 percent, remaining below the trailing 12-month average of 48.6 percent.
• Perceptions about households’ current financial situations deteriorated with a larger share of respondents reporting a worse financial situation compared to a year ago. Year-ahead expectations about households’ financial situations also deteriorated, with a smaller share expecting to be better off a year from now and a larger share expecting to be worse off.