Q3 ECI: Cooling compensation growth a sign of jobs market softening

Wells Fargo Research Team Wells Fargo

Summary

This morning's Employment Cost Index (ECI) reading offered additional evidence that the gradual softening in the labor market is translating to slower compensation growth. The ECI rose 0.8% quarter-over-quarter (not annualized) and 3.5% year-over-year in Q3, the latter being the softest year-ago reading since Q2-2021. The recent run rate suggests to us that the labor market is not a source of excess inflationary pressure at present.

Moderation in train

The cooling in the labor market is evident in the recent trend in labor compensation costs. The Employment Cost Index (ECI) rose 0.8% in Q3, softer than expected and a slight moderation from the prior quarter's pace. Relative to a year ago, labor costs have increased 3.5%, the slowest since Q2-2021.

The ECI is generally considered a better barometer of labor cost growth than average hourly earnings because it controls for compositional shifts in industry employment, covers public sector workers and includes benefit costs. Benefit costs (e.g., paid leave and insurance) account for about 30% of total compensation and were up 3.5% year-over-year in Q3, unchanged from Q2.

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Wells Fargo Research Team

Wells Fargo

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