Employment costs in U.S. match fastest 12-month gain since 2008

(Bloomberg) – Total U.S. employee compensation rose in the fourth quarter and matched the biggest 12-month gain since 2008, as private-sector pay picked up, Labor Department figures showed Wednesday.

Highlights of Employment Costs (Fourth Quarter)

Index rose 0.6% q/q (matching est.) after 0.7% gain in prior three months Wages and salaries rose 0.5% q/q following 0.7% gain Benefit costs increased 0.5% q/q after rising 0.8% Total compensation, which includes wages and benefits, rose 2.6% over past 12 months; matches 1Q 2015 as highest since 2008

Key Takeaways

Private-sector wages and salaries rose from a year earlier by 2.8%, also matching the best gain of this expansion. Several industry groups registered increases of 3% or higher, led by transportation and material moving at 3.5% and service occupations at 3.3%, underscoring demand for labor.

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A worker uses a power drill to attach a semi trailer mud flap on the factory floor at the Wabash National Corp. manufacturing facility in Lafayette, Indiana, U.S., on Tuesday, Feb. 7, 2017. U.S. factory output increased for the fourth time in five months amid gains in machinery and chemicals, extending a gradual recovery in manufacturing. Photographer: Luke Sharrett/Bloomberg

While wage growth has gradually improved, a sustained acceleration is yet to occur in the current economic expansion. The latest year-over-year increase in compensation indicates employers are making more generous offers as they compete for workers in the tightening labor market.

The government’s quarterly read on the ECI, which measures employer-paid taxes such as Social Security and Medicare in addition to the costs of wages and benefits, offers Federal Reserve policy makers another look into how compensation may feed into inflation. Central bankers later Wednesday will conclude a two-day policy meeting, where they’re expected to leave interest rates unchanged in Janet Yellen’s final gathering as chair.

January data on jobs and wages are due Friday in the Labor Department’s monthly employment report. Employers probably added around 180,000 workers to payrolls, the jobless rate held at 4.1% and average hourly earnings rose 2.6% from a year earlier, according to the median estimates of economists.

What Our Economists Say

The broader trend in the employment cost index provides reassuring evidence that not only the Phillips Curve remains a sound economic principle, but also that Yellen’s assessment that there was more slack in the labor market than conventional measures (such as the unemployment rate) would otherwise suggest, was also a prescient judgment. In hindsight, the Fed rightfully normalized policy at a gradual pace, and the moderate upward slope in the ECI should give the Powell Fed the opportunity to continue along a similar trajectory.-- Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Economics Read the full reaction note from Bloomberg Economics.

Other Details

Wages and salaries of all civilian workers rose 2.5% from year earlier, same as third quarter Benefit costs in private industry rose 2.3% from fourth quarter of 2016, down from 2.4% in prior quarter Employer costs for health benefits rose 1.1% from year ago and 2017 increase was slowest since 1995; Labor Department said “substantial” number of employers don’t respond on health-care benefit cost estimates, leaving “fewer observations supporting these estimates”