THE employment report on April Fool’s Day was a zinger at least based on the headlines. Non-farm payrolls in the US came in at 216,000 (240,000 private sector jobs were added as governments everywhere are shedding jobs rightfully so in your writer’s humble opinion).This essentially means that the private sector has added almost 500,000 jobs in the last two months. If you dig deeper into the household survey the numbers actually look even better. So why does this recovery feel so lousy and why are the consumer sentiment numbers for March so awful?Let’s pop open the hood and take a look at the engine’s parts. I can give you the short version in score format capital 100, labour 0. Now I don’t want to sound like a Marxist, but when I look back through the data it is very clear what or who has recovered and it is NOT your average Joe. The working class is simply not keeping up with inflation in the US Look at Chart 1.Real median household incomes show NEGATIVE growth over the last 10 years. I don’t have the data for 2010 (comes out in May) but I can almost guarantee you that it will not be much of a positive development.When it comes to economic confidence, wages are a very important factor. Although job growth has clearly improved, the working class has not seen a commensurate bump in wages (see Chart 2). Real average hourly earnings continued to fall over the past five months, and are growing at the slowest pace in 25 years.In the US (and likely here on our little island), the rise in food and fuel costs has caused increased frustration for the average person. In fact, in the U.S., the average person now spends 23 percent of the income on these items.So where is the recovery? Gross domestic product and corporate profits have recovered to their previous highs (see Chart 3).Capital has recovered but labour has languished.The good news is that the recovery in the labor market usually follows the recovery in corporate profits. As corporation’s profits continue to improve and productivity limits are reached, hiring tends to pick up and employment incomes subsequently rise.In our opinion this will take some time and the job recovery will be slow. What is interesting, however, is this job recovery is actually pretty normal when compared to the prior recessions.In fact, it is actually better than the last recession in terms of job gains - producing more jobs at this stage than the 1991 and 2001 recessions (see Chart 4).This brings me to Bermuda. From the limited data available, we have constructed a proxy for the real wage rate in Bermuda (see Chart 5).What is apparent from this is the stark contrast in real wage growth compared to our largest trading partner. Without more comprehensive government data on average hourly wages, median household incomes, unemployment and productivity it is difficult to accurately state with certainty the true nature of Bermuda’s working class. There are some implications to consider however.First, it could be argued that escalating wages rates in Bermuda have made many aspects of our service sector uncompetitive in the global world. This is evident in the consistent wave of “on-shoring” that continues to take place.Many companies are expanding their onshore subsidiaries or opening satellite offices in other jurisdictions where the pool of talent may be broader and the wage rates far less. This would lead us to assume that job growth will be held back and hampered until wage rates revert to a lower level in comparison to direct competitive country wages. Why would I pay someone $20 per hour when I can pay them $8.50?This also would lead us to conclude that we are likely at the early stage of the battle between labour and capital in Bermuda. In order to restore profitability to a level that matches the new aggregate demand level in Bermuda, companies will continue to try and squeeze productivity form current employees and may have to continue lay-offs and benefit reductions.Again, anecdotal evidence would support this and we continue to see waves of restructuring wash over the various local businesses. It would not be surprising to see continued dissention between management and unions as the battle between capital and labour intensifies.One other more positive conclusion could be drawn from this data as well. It may be that higher paying jobs are being created in Bermuda and therefore they are overwhelming the lower paid jobs that are being lost and/or on-shored. Again, without more detailed statistics on the job composition in Bermuda it is hard to state with absolute clarity what the true underlying dynamics are.In conclusion, it could be fair to assume that any pick-up in the job market in Bermuda will not occur until corporate profitability comes close to or hits prior highs. Workers on the island will likely be asked to do more for less for some time to come.Nathan Kowalski is the chief financial officer at Anchor Investment Management. He holds a Chartered Financial Analyst (CFA) designation and Chartered Accountant (CA) designation. To contact Anchor, e-mail info[AT]anchor.bm or phone 296-3515.