U.S. labour costs post second straight quarter of robust gains

Latest indication pay gains gathering momentum
By Lucia Mutikani
|payroll-reporter.com|Last Updated: 06/10/2015

WASHINGTON (Reuters) — U.S. labour costs increased strongly in the first quarter as wages in the private sector accelerated sharply, the latest indication that pay gains could be gathering momentum.

In its Employer Costs for Employee Compensation report, the Labor Department said labour costs increased 4.9 per cent in the first quarter compared to the same period last year. That followed a similar gain in the fourth quarter.

The ECEC measures employer costs for wages, salaries, and employee benefits for nonfarm private and state and local government workers.

It is different from the department's closely watched Employment Cost Index, which uses fixed occupation and industry weights. Economists say this means the ECI ignores the labor market's changing structure, leading to an understatement of wage pressures.

The ECEC adjusts those weights as the composition of the workforce changes.

Until recently, wage growth had long been the missing piece in the jobs recovery. It is one of the indicators being closely watched by Federal Reserve officials as they consider raising interest rates this year.

"The Fed no longer has to look for labour cost pressure. It is here and eventually this will filter through to higher consumer prices, notably for services," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

Wages and salaries of all workers increased 4.2 per cent in the first quarter from a year ago. Wages and salaries for full-time workers in private industries increased 5.1 per cent.

"If Fed Chair Yellen is targeting 3-4 per cent wage and salaries inflation as a signal of labour market repair, maybe she's there," said Sam Coffin, an economist at UBS in Stamford, Connecticut.

Independent surveys, including one on small businesses, have also pointed to a noticeable pick-up in wages, even as the ECI and the average hourly earnings measure in the employment report have suggested a more modest increase.

The ECI, which was published in April, showed labour costs increased 2.6 per cent in the first quarter, while last week's employment report showed average hourly earnings rose 2.3 per cent in the 21 months through May.

"On net, ECEC continues to suggest that other measures are understating labour costs," said Coffin. "In turn, they increasingly threaten inflation pressures, even as they also probably will support a rebound in consumer spending growth."

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