April 28, 2017
The employment cost index for civilian workers rose at a 3.1% annual rate in the first quarter after having risen 1.9%rate in fourth quarter. Over the course of the past year it has risen 2.4%. Thus, the labor market is slowly beginning to get tighter, and to attract the workers that they want employers are having to work employees longer hours, and offer higher wages and/or more attractive benefits packages.
With the unemployment rate at 4.5% and full employment also presumably at 5.0%, it is not surprising that we are beginning to see a hint of upward pressure on compensation.
Wages climbed at a 3.2% rate in the first quarter versus 1.9% pace in fourth quarter. Over the course of the past year wages have been rising at a 2.4% pace. Wage pressures are beginning to accelerate gradually.
Benefits climbed at a 2.7% pace in the first quarter versus 1.8% in the fourth quarter. As a result, the yearly increase in benefits is now 2.2%.
What happens to labor costs is important, but what we really want to know is how those labor costs compare to the gains in productivity. If I pay you 5.0% more money but you are 5.0% more productive, I really don’t care. In that case, unit labor costs were unchanged.
Currently, unit labor costs have risen 2.0% in the past year as compensation rose 3.0% while productivity increased by 1.0%. Such an increase in ULC’s is consistent with an inflation rate somewhat higher than the Fed’s desired target rate of 2.0%. If that is the case, something is clearly different. Productivity gains are no longer offsetting the increase in labor costs. The Fed should continue to raise interest rates.