Sunday, 18 of February of 2018

Economics. Explained.  

Employment Cost Index

January 31, 2018

The employment cost index for civilian workers rose at a 2.5% annual rate in the fourth quarter after having risen at a 2.8% annual rate in the third quarter.  Over the course of the past year it has risen 2.7%.  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 4.1% and full employment also presumably at 4.5-5.0%, it is not surprising that we are beginning to see a hint of upward pressure on compensation.

Wages climbed at a 2.2% rate in the fourth quarter after having risen 2.8% in the third quarter.  Over the course of the past year wages have been rising  at a 2.6% pace.  Wage pressures are beginning to accelerate gradually.

Benefits climbed at a 2.1% rate in the fourth quarter after having risen at a 3.0% rate in the third quarter.   As a result, the yearly increase in benefits is now 2.6%.

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 3.0% more money but you are 3.0% more productive, I really don’t care.  In that case, unit labor costs were unchanged.

Currently, unit labor costs  have declined 0.7% in the past year as compensation rose 0.8% while productivity increased by 1.5%.   Given that labor costs are thus far rising slightly slower than the  gains in productivity, there is not yet upward pressure on the inflation rate from the obvious tightness in the labor market.  As we look forward into 2018 we expect compensation to climb to about the 3.0% mark, but at the same time we expected productivity to rise by 2.0%.  Thus, unit labor costs at the end of next year are likely to be rising at a 1.0% which is faster than the 0.7% decline registered last year so there will be some upward pressure on the inflation rate this year stemming from the tight labor market.  However a 1.0% increase in ULC’s is clearly compatible with the Fed’s 2.0% inflation target.

Stephen Slifer


Charleston, SC

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