December 10, 2019

The Bureau of Labor Statistics initially indicated that hourly compensation rose 3.2% in the third quarter.  Upon revision that increase was cut substantially to a 2.3% increase.  At the same time the second quarter increase was revised downward from an initially-reported 4.8% increase to a revised 2.5% gain.  The earlier data suggested that, at last, the tightness in the labor market was beginning to raise wages and showed a year-over-year increase of 4.5%.  Upon revision that year-over-year increase is now 3.7%.  As a result of these changes we expect compensation to continue to increase in 2020 by 4.2%.  That is still a slight upward trajectory, but less that we thought earlier..

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 have risen 2.2% in the past year.  Like the compensation data, that current gain is a lot smaller than what we thought a month ago which was 3.1%,  The current 2.2% yearly increase of 2.2% consists of a 3.7% increase in compensation partially offset by a 1.5% increase in productivity.  However, as we go forward into 2020 we are looking for ULC’s to rise 2.5%.  That is a bit faster than we have been seeing, but not too much.

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 second quarter real compensation rose 0.5% after having declined 0.4% in the second quarter and risen 8.2% in the first quarter.   The third quarter increase consisted of a 2.3% increase in compensation partially offset by a 1.8% increase in inflation .  In the past year real compensation has risen 1.9%.

Stephen Slifer

NumberNomics

Charleston, SC