Labor Costs Up Sharply for 2nd Straight Quarter

Improving wages could prod the Fed to move sooner on interest rates.
Matthew HellerJune 12, 2015

In an indication that U.S. workers may finally be getting a meaningful raise, labor costs increased 4.9% in the first quarter compared to the same period last year, according to the U.S. Department of Labor.

Average cost per hour worked rose to $33.49 in March, versus $31.93 a year earlier, the department said in its Employer Costs for Employee Compensation report for March 2015. Hourly wages and salaries climbed 4.2% to $22.88, while benefits rose 6.4% to $10.61.

The first-quarter increase followed a relatively robust fourth quarter for wage growth, as measured by the ECEC report. The Labor Department’s closely watched Employment Cost Index showed labor costs rose 2.6% in the first quarter, accelerating from 2.2% growth in the third and fourth quarters.

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As Reuters reports, wage growth “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 labor 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.

In a note to clients, UBS economist Samuel Coffin cautioned investors to “ignore at your own peril” the latest ECEC report. “If Fed Chair [Janet] Yellen is targeting 3-4% wage and salaries inflation as a signal of labor market repair, maybe she’s there,” he wrote.

The ECEC measures employer costs for wages, salaries, and employee benefits for nonfarm private and state and local government workers, while the ECI uses fixed weights for individual industries and occupations. Some economists, Reuters noted, believe “this means the ECI ignores the labor market’s changing structure, leading to an understatement of wage pressures.”

Independent surveys 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.

There has been some talk on Wall Street that the Fed will raise rates at its July meeting. “Throughout the last year, the main ingredient missing from the Fed’s equation has been wage growth,” Business Insider said. “And it looks like it’s here.”

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