Employment Cost Index: Rings of the Redwood

We look at the quarterly Employment Cost Index for June 2023 as we see a decline from 4.8% to 4.5%.

“I’m going to need 6%!”

• Slower progress being made on compensation creep for employers but moving in the right direction for those worried about any hints of wage-price spiral flashbacks.

• The pace and timing of a return to the low 2% area could take a lot longer with employment strong and labor groups making demands for packages they can win.

• When inflation slams so many consumers, their willingness to move to a new job or to fight for higher wages and/or benefits intrinsically grows, so this might take a while to normalize.

The above chart updates the Employment Cost Index for June 2023. The ECI measures labor cost growth with total compensation a function of wages/salaries and benefit trends. The index covers all civilian workers. If we look just at the private sector, the ECI is on top of the all-civilian metrics in 2023 but was 5.5% last year in June 2022 vs. 5.1% in the all-civilian ECI. 

You can scan the occupations for differing comp inflation metrics (Table 5 of the release), and one high-payroll-count category that jumped out was Health Care and Social Assistance at rates above 5% including some that had 7% handles back in 2022. There is a range worth perusing, but it adds up to slowing growth but growth ahead of inflation targets nonetheless.

Rising labor costs fit into inflation and earnings picture logically. Either the employer has the pricing power to pass it along or the employer’s profit margin gets squeezed. That means either inflation or eroding profits. The process is more of a “dimmer” than an “on-off switch” since the employer can take out other costs, improve efficiencies, and do what it takes to hold profit targets steady. Easier said than done, of course.

For the June quarter, the quarter-to-quarter total compensation costs for 2Q23 declined to 1.0% for the rolling 3-month period from 1.2% for the March quarter. That 1.0% was the lowest since 0.7% back in the June 2021 quarter and translates into a 4.5% YoY trend. The 4.5% ECI rise marked a decline from the +4.8% YoY in the March quarters after three quarters with 5% handles including a 5.1% level in Dec 2022, 5.0% in Sep 2022, and 5.1% in Jun 2022. 

The wages and salaries component of the comp index was 4.6% vs. 5.7% in June 2022, so the trend line is working even if at a measured and gradual pace. The Benefits piece of the index rose by 3.9% in the June 2023 quarter vs. 5.3% in June 2022.

Overall, the trend line was positive but still signals pressure on PCE levels given that wages are well above the 2% inflation targets.

The above chart plots the ECI time series vs. unemployment from 2001. The compensation pressures underscore the challenges in a low unemployment market backdrop. You don’t see the ECI above the unemployment rate as a rule. This is where the Fed tightening risk and connection to labor demand weighs in as a worry for those who try to handicap what the next FOMC move will be. The 4.5% ECI vs. the 3.6% unemployment rate is a very rare visual, and the trend gets back to the policy dilemma of needing to drive jobs lower to get back to 2% PCE.