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Labor Costs

Compensation costs, as measured by the Employment Cost Index (ECI), had been rising at a slower pace since early 2005, but since the first quarter of 2006, this slowdown reversed itself; during the entire course of 2006, the pace of ECI growth sped up. Data on production workers’ hourly earnings suggest that the ECI’s wages and salaries component is responsible for the acceleration: this component has been increasing relatively faster since the first quarter of 2006. Economists usually worry that higher growth rates in the cost of employment might increase inflationary pressures. Indeed, a faster pace of core CPI growth has accompanied the higher growth rates of both the ECI and hourly earnings.

Employment Cost and Inflation

Of course, workers might be compensated more just because they are producing more, but this does not appear to have been the case over the past couple years. While unit labor costs (a productivity-adjusted measure of employment costs), have gained some momentum since the second half of 2004, the changes have been negatively correlated with changes in output per hour in the nonfarm business sector. This has been especially true since 2000. Hence, relatively higher growth in unit labor costs has coincided with relatively smaller gains in output per hour in the nonfarm business sector.

Productivity and Unit Costs

In 2006, almost 68 percent of the total compensation costs for service-providing workers consisted of wages and salaries. (This was very similar in the goods-producing sector.) The next-largest components were insurance benefits (11 percent), paid leave (7.8 percent), and retirement and savings benefits (7 percent). Growth in benefits was usually so high that it led to a greater increase in total compensation even when wages and salaries did not grow at a faster pace. This was the story between the fourth quarter of 2002 and the first quarter of 2006. But even though benefits have historically increased at a rate higher than wages and salaries, since the first quarter of 2006, all components of compensation have grown at a similar pace.

Distribution of Total Compensation, 2006
Components of Employment Compensation and Inflation

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