ECI: A whiff of relief on labor costs

Summary

The labor crunch became even more costly for businesses in the fourth quarter, with the employment Cost Index (ECI) rising 1.0%. Over the past year, the ECI is up 4.0%–the biggest one-year gain in data going back to 2001. Yet while still blistering, the quarterly increase was more restrained than Q3's 1.3% gain. That may tamp down fears of a wage-price spiral amid signs businesses are not upping pay at such a frenzied pace.

Labor costs slow, but still rising at a scorching rate 

The labor crunch became even more costly for businesses in the fourth quarter, with the Employment Cost Index (ECI) rising 1.0%. Over the past year, the ECI is up 4.0%–the biggest one year gaining data going back to 2001. Yet while still blistering, the quarterly increase was more restrained than Q3's 1.3% gain. That may tamp down fears of a wage-price spiral amid signs businesses are not upping pay at such a frenzied pace.

The ECI includes benefits in addition to wages and salary costs and also controls for compositional changes in the workforce. That makes it a cleaner read on the degree of labor cost pressures facing businesses. The FOMC's emphasis on the ECI was on full display in Chair Powell's December post-meeting press conference when he highlighted it as a reason he thought about announcing a faster pace for tapering asset purchases back in November. The more temperate quarterly gain likely has Fed officials breathing a bit of relief that labor costs did not accelerate further on a sequential basis, but glad they have telegraphed a more hawkish path for policy given that the overall pace of employment costs continue to point to a very tight labor market.

The overall strength in the labor market was evident with a 1.1% rise in wage & salary costs in Q4, far stronger than any gain over the past cycle. The heat remains turned up across a broad range of industries, with notable gains in retail, transportation, construction and healthcare. Yet Q4's gain marks a slowdown compared to Q3 that was driven by more moderate pay increases in some lower-pay sectors like leisure & hospitality but also higher-paying industries like professional & business services and private education, and an outright decline financial activities.

Employers continue to favor stepping up pay over perks. Benefit costs rose 0.9% over the quarter, with private and public costs rising by the same degree. A breakdown of Q4 benets will not be available until March. However, data through the third quarter showed non-production bonus expenses leveling off as employers have been forced to scrap one-off payments in lieu of pay on a more "permanent" basis. Increasing instead has been paid leave and retirement benefits.

While the cooler quarterly pace of ECI suggests employment costs are not running away, it is far too early to suggest the worst is over when it comes to labor cost growth. Amid an already tight labor market and the Omicron wave dealing a setback for the labor supply outlook, wage pressures are likely to remain firmly upward over the next few quarters.

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