The Economy

Labor Costs Gauge Surges 1.3% in Q3

“It is hardly surprising that employers are having to pay up given the shortage of qualified labor at the moment."
Matthew HellerOctober 29, 2021

The cost of employing the average U.S. worker rose in the third quarter by the most since 2001, underscoring the impact of labor shortages resulting from the coronavirus pandemic.

The Labor Department reported Friday that its employment cost index (ECI), a broad gauge of wages and benefits, increased 1.3% from the prior quarter. Economists had forecast a 0.9% gain.

Labor costs surged 3.7% on a year-on-year basis, the largest rise since the fourth quarter of 2004, after increasing 2.9% in the second quarter.

“It is hardly surprising that employers are having to pay up given the shortage of qualified labor at the moment,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez.

As Reuters reports, “The COVID-19 pandemic has upended labor market dynamics, creating an economy-wide acute shortage of workers. There were 10.4 million job openings at the end of August.”

The ECI is widely viewed as a predictor of core inflation. Wages, which account for some 70% of employment costs, increased 1.5% in the third quarter after rising 0.7% in the second quarter, exceeding inflation, which rose 1.2%.

“While wage increases were initially concentrated in lower-wage industries, more recently wage pressures have been broadening across industries,” said Veronica Clark, an economist at Citigroup in New York.

“Upward pressure on wages reaching relatively higher-wage industries would suggest a greater chance that rising labor costs, along with rising prices for various other inputs, are passed on through higher consumer prices,” she added.

Over the past 12 months, wages have risen by 4.2%, while CPI inflation is up more than 5%. The Federal Reserve’s preferred inflation gauge rose 4.4% in September from the previous year, the fastest pace since 1991.

“Persistently high inflation could offset the increase in wages and make households worse off,” The Wall Street Journal reported. “It could also force the central bank to raise interest rates to keep prices in check. Such a move also risks slowing the economic recovery when the unemployment rate remains higher than it was before the pandemic.”