Saturday, 21 of October of 2017

Economics. Explained.  

Hourly Compensation

August 9, 2017

The Bureau of Labor Statistics indicated that compensation rose 1.5% in the second quarter after having jumped 5.4% in the first quarter.  This means that over the past year hourly compensation has climbed by 1.0% but with a lot of bounciness from quarter to quarter.

But, as noted in the section on unit labor costs, what really matters to an employer is not how much they pay someone, but how much they pay them adjusted for the change in productivity.  If I pay you 3% more money, but you are 3% more productive, I really do not care.  I am getting 3% more output from you.  That increase in labor costs adjusted for the change in productivity is known as “unit labor costs”.  If I pay you 3.0% more money but you are no more productive, then my unit labor costs have risen 3% and I may need to raise prices to compensate for the additional labor cost.  So watch compensation, but focus even more closely on unit labor costs.

Currently, unit labor costs have declined 0.2% in the past year but that figure does bounce around a lot from quarter to quarter.  Going forward, the tightness in the labor market should cause compensation to climb by 2.8% in 2017.  Productivity should climb by 0.9%.  As a result, unit labor costs in 2017 should rise by 1.9%.  That will put a moderate amount of upward pressure on the inflation rate.

Growth in hourly compensation is a good thing, but some of that increase can be offset by inflation.  So what we are also  interested in is real hourly compensation.  In the second quarter real compensation rose 1.9% after having climbed by 2.3% in the first quarter.   The first quarter decline consisted of a 1.5% increase in compensation which was  enhanced by a 0.4% decline in inflation as oil prices fell slightly.  In the past year real compensation has declined 0.9% but that largely reflects a huge 8.1% drop in the fourth quarter of last year.  The trend rate for real hourly compensation seems to be about +1.0%.

Stephen Slifer


Charleston, SC

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