October 31, 2019

The employment cost index for civilian workers climbed at a 2.8% rate in the third quarter after risen 2.3% in the second quarter   Over the course of the past year it has risen 2.8%.  Thus, the labor market continues to gradually 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 3.5% and full employment presumably at 4.5%, it is not surprising that we are beginning to see a hint of upward pressure on compensation.

Wages climbed at a 3.5% rate in the third quarter compared to a 2.7% pace in the second quarter.  Over the course of the past year wages have been rising  at a 2.9% pace.  Wage pressures are beginning to accelerate gradually.

Benefits climbed at a 2.3% rate in the third quarter after rising at a 2.0% rate in the second quarter.   As a result, the yearly increase in benefits is now 2.4%.

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”  — labor costs adjusted for the change in productivity — were unchanged.

Currently, unit labor costs  have risen 2.6% in the past year as compensation rose 4.4% while productivity increased by 1.8%.    We expect compensation to climb to about the 2.5% mark this year, but at the same time we expect productivity to rise by 2.4%.  Thus, unit labor costs are now rising at a rate slightly faster than the Fed’s 2.0% inflation target.

Stephen Slifer


Charleston, SC