Economy

Worker Pay Rises Most in Nearly 10 Years

Paul Ausick

Published: July 31, 2018 1:00 pm

Last Updated: January 11, 2020 8:07 pm

The U.S. Bureau of Labor Statistics (BLS) reported Tuesday that its employment cost index (ECI) rose 0.6% for the three-month period ended June 30 and that the increase for the 12-month period to that date came in at 2.8%. That’s the highest annual increase since the third quarter of 2008.

The ECI measures the change in the cost of labor, disregarding the influence of employment shifts among occupations and industries.

Unsurprisingly, the ECI began its climb at the same time that the Federal Reserve began raising interest rates from 0.25%. The low-interest rate regime in force following the financial crisis of 2008 and 2009 kept inflation well below the 2% Fed target and effectively capped workers’ wages as pay increases remained in line with slowly rising inflation.

As the Fed raises its interest rates, inflation also moves higher as businesses must pay more to hire and keep employees. At last look, the core consumer price index (CPI) inflation rate (excluding food and energy) was 2.3% and the Fed’s preferred inflation index, Personal Consumption Expenditures (PCE), was tabbed at 2.2% report in the Labor Department’s Bureau of Economic Analysis (BEA) report on personal income and outlays, also released Tuesday. Excluding food and energy, PCE inflation is running at 1.9%.

According to the BLS, private industry wages rose 2.9%, compared to a 2.4% increase reported at the end of June last year. Benefit costs rose from 2.2% to 2.8% in private industry. Total compensation rose from 2.4% to 2.9% from June 2017 to June 2018.

Among state and local governments, wage costs slipped from a gain of 2.1% in June 2017 to an increase of 1.9% last month, and benefit costs drifted down from 3.2% to 3.1%. Total compensation for government employees dipped from 2.6% growth to 2.3%.

According to a report, also released Tuesday, from outplacement firm Challenger, Gray & Christmas, at the end of June 58% of U.S. companies are reviewing compensation structures to ensure pay parity. In January 48% were conducting similar reviews.

Because most wage studies indicate that women are often paid less than men for the same type of work, as companies equalize their pay scales it seems clear that employment costs will need to rise at a clip that outpaces inflation.

Gender difference is not the only thing pushing compensation costs higher either. Some skills are in such demand that employers have no choice but to raise compensation or benefits to attract and keep workers. This situation won’t go on forever, but for many workers, it’s about time considering the long recovery from a financial crisis that saw scant improvement in their disposable income.