The broadest measure of U.S labor costs rose modestly in the first quarter as wages continued to show weak growth despite solid employment gains.
The Labor Department reported Friday that the Employment Cost Index increased 0.6% after an unrevised 0.5% gain in the fourth quarter. From a year earlier, total compensation, which includes wages and benefits, increased 1.9%, a very slight deceleration from the 2% annual gain recorded in each of the prior three quarters.
The first-quarter gains were in line with economists’ expectations. “We continue to be on track for very slow progress,” BNP Paribas economist Laura Rosner told The Wall Street Journal.
Higher labor costs suggest a tightening labor market that could fuel higher inflation; lower costs suggest slack and economic weakness.
U.S. employers have created more than 200,000 jobs a month on average over the past four years, driving the unemployment rate down to 5% last month from above 8% in early 2012. But as the WSJ reports, some older workers and those displaced during the recession have returned to the workforce recently, making it difficult for existing workers to demand higher pay.
In addition, Rosner said, productivity growth in many service fields has been low, meaning even small wage gains can feel expensive for employers in those sectors.
For private-sector workers, wages and salaries grew 0.7% during the first quarter and rose 2% from a year earlier, while benefits advanced 0.4% on quarter and 1.2% on the year. The annual benefits increase was the smallest since the fourth quarter of 2009.
The labor costs data “could give the Federal Reserve more latitude to hold off on an interest rate hike until later this year,” Reuters said, noting that the first-quarter gain in total compensation is well below the 3% threshold that economists say is needed to bring inflation closer to the Fed’s 2% inflation target.
The Fed on Wednesday left its benchmark overnight interest rate unchanged and suggested it was in no hurry to tighten monetary policy further after hiking rates in December for the first time in nearly a decade.