The Employment Cost Index (ECI) was higher than expectations and increased by 0.8% in the first quarter, above the previous quarter’s change of 0.5%. It was anticipated to have increased by 0.6%. The ECI is now 2.4% higher than a year ago, which is the highest since first quarter 2015. Total wages and salaries rose by 0.8% and benefits by just 0.7%. Total wages and salaries for the private sector are now 2.6% higher, while benefits are 1.9%. Private sector benefits are considerably lagging the growth rate of both total benefits and private and total wages and salaries.
As the debate continues over just how much slack there currently is in the labour market and, therefore, just how fast the Fed needs to continue to raise interest rates, the answer will ultimately be found in the wage inflation data. If the labour market truly is tight and those workers who dropped out of the labour-force really are not planning to return, this suggests that the pool of available workers upon which to draw to ease any capacity constraints is much smaller, and therefore, labour costs should rise. Conversely, if many workers are ready, willing, and able to rejoin the labour-force, but have been waiting for a stronger recovery to take place to draw them back in, then labour costs could still remain muted for a little while longer. The share of workers working part-time who would like to work full-time but are unable to find work has only just fallen below its median since 1955, hence this would suggest some slack still in the workforce. Meanwhile, the small rises in the participation rate, coupled with relatively solid gains in payroll growth and an unemployment rate that hasn’t fallen as much as one would have expected given the gains, also suggests some additional slack. As it stands today, the ECI (which adjusts for inter-industry shifts in employment) is probably the best measure to look at, as opposed to average hourly earnings, which does not make such industry adjustments (and has shown a slightly faster rate of an increase recently, 2.7%). The pace of gains over the last year or more are, however, still not really showing any major signs of breakout, and are certainly still below where one would expect them to be with a 4.5% unemployment rate. The bottom line for this quarter is that compensation costs are firming, but are still not exerting a huge amount of upward pressure. For the Fed this higher-than-anticipated quarter increase will be encouraging, though will not cause it to alter a no change in policy at next week’s FOMC meeting.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.