(Bloomberg) — Employment costs rose at a slower pace in the third quarter compared with the prior three months, indicating workers have limited scope to bargain for higher wages as the U.S. economy struggles to pick up.

The employment cost index increased 0.4% following a 0.5% gain in the prior quarter, the Department of Labor said Wednesday. Business activity unexpectedly contracted for a second month in October, another report showed.

A global economic slowdown and the prospect of more than $600 billion in automatic tax increases and government spending cuts — the so-called fiscal cliff — is encouraging some employers to hold the line on worker pay and other costs, according to economist Ryan Sweet. Limited wage growth makes it harder for households to step up purchases, which account for about 70% of the economy.

“There’s a lot of concerns for businesses,” says Sweet, senior economist at Moody’s Analytics Inc. in West Chester, Pa., who correctly forecast October employment costs. “Not until we get beyond the fiscal cliff will we start to see manufacturing find its rhythm again.”

The economy and labor market are the central issues in the presidential campaign, with less than a week before Americans head to the polls. The outcome of the Nov. 6 election is too close to call, with President Barack Obama and Republican challenger Mitt Romney in a tight race in a handful of swing states.

The DOL report showed wages for all employees climbed 0.3%, while benefit costs advanced 0.8%.

The gain in wages and salaries, which account for about 70% of total employment costs, was the smallest this year. Private wages climbed 0.4%, the same as the second quarter. Pay for state and local government workers advanced 0.2%, the least in a year.

Wages of all employees increased 1.7% from the same quarter last year.

Benefit costs’ 0.8% gain was the biggest since the second quarter of 2011. Compared with the same three months in 2011, benefit expenses were up 2.6%.

Company costs for health benefits increased 3% in the third quarter from the same period last year.

Further gains in income may be needed to sustain recent gains in household purchases. Consumer spending climbed in September at a faster pace than the worker pay.

The 0.8% gain in September spending was the most since February, Commerce Department data showed earlier this week. With incomes rising 0.4%, the saving rate dropped to 3.3%, the lowest since last November.

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