Wednesday, 20 of June of 2018

Economics. Explained.  

Employment Cost Index

April 27, 2018

The employment cost index for civilian workers climbed at a 3.3% pace in the first quarter after having risen at a 2.5% annual rate in the fourth quarter.  Over the course of the past year it has risen 2.7%.  Thus, the labor market continues to get tighter, and to attract the workers that they want firms 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 3.7% annual rate in the first quarter after having risen 2.2% rate in the fourth quarter.  Over the course of the past year wages have been rising  at a 2.7% pace.  Wage pressures are beginning to accelerate gradually.

Benefits climbed at a 3.0% rate in the first quarter after having risen 2.1% in the fourth 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 risen 1.7% in the past year as compensation rose 2.9% while productivity increased by 1.1%.    As we look forward into 2018 we expect compensation to climb to about the 3.5% mark, but at the same time we expected productivity to rise by 1.8%.  Thus, unit labor costs at the end of this year are likely to be rising at a 1.7% which means that there will be only slight upward pressure on the inflation rate this year stemming from the tight labor market.  A 1.7% increase in ULC’s is clearly compatible with the Fed’s 2.0% inflation target.

Stephen Slifer


Charleston, SC

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