U.S. labour costs rise modestly in first quarter

But market still struggling to generate strong wage growth
|hrreporter.com|Last Updated: 04/29/2016

WASHINGTON (Reuters) — U.S. labour costs rose steadily in the first quarter as the firming jobs market struggled to generate strong wage growth, which could give the Federal Reserve more latitude to hold off on an interest rate hike until later this year.

The Employment Cost Index, the broadest measure of labour costs, increased 0.6 per cent after an unrevised 0.5 per cent gain in the fourth quarter, the Labor Department said on Friday.

The first-quarter increase in the ECI was in line with economists' expectations.

In the 12 months through March, labor costs rose 1.9 per cent, well below the three per cent threshold that economists say is needed to bring inflation closer to the Fed's two per cent inflation target. Labour costs increased two per cent in the year to December.

The Fed on Wednesday left its benchmark overnight interest rate unchanged and suggested it was in no hurry to tighten monetary policy further. It hiked rates in December for the first time in nearly a decade.

The moderate labour cost reading came on the heels of a report on Thursday showing broad weakness in the economy in the first quarter. Wage growth has been frustratingly slow and could remain moderate as the fairly robust labour market attracts people who had given up the search for work.

Though employment gains have been broad, they have tended to be concentrated in the services industries, especially restaurants and the retail sector, which typically pay less compared to the manufacturing and construction sectors.

The ECI is widely viewed by policymakers and economists as one of the better measures of labour market slack. It is also considered a better predictor of core inflation.

Wages and salaries, which account for 70 per cent of employment costs, rose 0.7 per cent in the first quarter. That was the biggest gain in a year.

They increased 0.5 per cent in the fourth quarter. Wages and salaries were up 2.0 per cent in the 12 months through March. They rose 2.1 per cent in the year to December.

Private sector wages and salaries advanced 0.7 per cent in the first quarter after rising 0.6 per cent in the prior quarter.

Benefits for all workers rose 0.5 per cent in the first quarter after a 0.6 per cent gain in the prior period.

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