March 5, 2020
The Bureau of Labor Statistics initially indicated that hourly compensation rose 2.1% in the fourth quarter after declining 0.1% in the third quarter. The year-over-year increase is now 3.5%. As a result of these changes we expect compensation to continue to increase in 2020 by 3.9%.
But, as noted in the section on unit labor costs, what really matters to an employer is not how much they pay someone, but how much they pay them adjusted for the change in productivity. If I pay you 3% more money, but you are 3% more productive, I really do not care. I am getting 3% more output from you. That increase in labor costs adjusted for the change in productivity is known as “unit labor costs”. If I pay you 3.0% more money but you are no more productive, then my unit labor costs have risen 3% and I may need to raise prices to compensate for the additional labor cost. So watch compensation, but focus even more closely on unit labor costs.
Currently, unit labor costs rose 1.7% in 2019 The current 2.1% projected yearly increase for unit labor costs in 2020 of consists of a 3.8% increase in compensation partially offset by a 1.7% increase in productivity.
Growth in hourly compensation is a good thing, but some of that increase can be offset by inflation. So what we are also interested in is real hourly compensation. In the fourth quarter real compensation declined 0.2% after having declined 1.9% in the third quarter The fourth quarter increase consisted of a 2.1% increase in compensation partially offset by a 2.3% increase in inflation . In the past year real compensation has risen 1.5%.