U.S. labor costs increased solidly in the third quarter amid strong wage growth, the latest indication that the Federal Reserve could keep interest rates high for some time. The rise in compensation reported on Tuesday by the Labor Department was slightly stronger than expected and helps to explain the surge in consumer spending last quarter, which contributed to the fastest economic growth pace in nearly two years.
Quick Read
- In the third quarter (July-September), wages and benefits grew at a marginally faster rate than they did in the preceding quarter, offering advantages to workers. However, this trend could challenge the Federal Reserve’s efforts to combat inflation.
- The Employment Cost Index showed a 1.1% increase in compensation for the third quarter, a rise from the 1% observed in the April-June period, as reported by the Labor Department on Tuesday.
- Year-over-year, the growth in compensation decelerated to 4.3% from the second quarter’s 4.5%.
- When adjusted for inflation, the total compensation saw a 0.6% growth in the third quarter compared to the prior year. This is significantly lower than the 1.6% growth observed in the second quarter.
- Some metrics indicate a deceleration in average wages. For instance, private sector wages and salaries, which exclude bonuses and incentive pay, grew by 0.9% in the third quarter, a decrease from the 1.1% growth in the prior quarter.
- The Federal Reserve values the Employment Cost Index as a critical metric for wages and benefits. The ECI offers insights into how pay shifts for consistent job roles, whereas average hourly pay can be influenced by factors like large-scale layoffs among lower-income workers.
- The ECI recorded its highest growth in pay and benefits at 5.1% in the previous fall. However, during this period, inflation was escalating rapidly, diminishing the overall purchasing power of Americans. The aim of the Federal Reserve is to curb inflation so that even modest pay increments lead to gains in inflation-adjusted income.
- Jerome Powell, the Federal Reserve Chair, has suggested that yearly pay growth of around 3.5% aligns with the central bank’s inflation target of 2%.
- While an increase in pay is beneficial for employees, it can inadvertently stimulate inflation, especially if businesses decide to transfer the elevated labor costs to consumers through increased prices. Alternatively, companies can either compromise on profit margins or enhance workforce efficiency, allowing them to offer higher wages without increasing prices.
The Associated Press has the story:
US wages rose at a solid pace this summer, challenging Fed’s inflation fight
Newslooks- WASHINGTON (AP)
Wages and benefits grew at a slightly faster pace in the July-September quarter than the previous three months, a benefit for workers but a trend that also represents a risk to the Federal Reserve’s fight against inflation.
Compensation as measured by the Employment Cost Index increased 1.1% in the third quarter, up from a 1% rise in the April-June quarter, the Labor Department said Tuesday. Compared with a year ago, compensation growth slowed to 4.3% from 4.5% in the second quarter.
Adjusted for inflation, total compensation rose 0.6% in the third quarter compared with a year earlier, much slower than the second-quarter increase of 1.6%.
By some measures, average pay cooled, economists pointed out. Wages and salaries for private sector workers, excluding those who receive bonuses and other incentive pay, rose 0.9% in the third quarter, down from 1.1% in the previous period.
Fed officials consider the ECI one of the most important measures of wages and benefits because it measures how pay changes for the same mix of jobs, rather than average hourly pay, which can be pushed higher by widespread layoffs among lower-income workers, for example.
Growth in pay and benefits, as measured by the ECI, peaked at 5.1% last fall. Yet at that time, inflation was rising much more quickly, reducing Americans’ overall buying power. The Fed’s goal is to slow inflation so that even smaller pay increases can result in inflation-adjusted income gains.
Fed Chair Jerome Powell has indicated that pay increases at a pace of about 3.5% annually are consistent with the central bank’s 2% inflation target.
While higher pay is good for workers, it can also fuel inflation if companies choose to pass on the higher labor costs in the form of higher prices. Companies can also accept lower profit margins or boost the efficiency of their workforce, which allows them to pay more without lifting prices.
