Employment Cost IndexEmployment Cost Index(ECI)(ECI)

Dong Tommy Kim

Hien Misa Nguyen

Nyle Rock

Employment Cost Index (ECI)Employment Cost Index (ECI)

Published by: Bureau of Labor Published by: Bureau of Labor Statistics (BLS) Statistics (BLS)

Frequency: quarterly Frequency: quarterly Period Covered: prior quarter Period Covered: prior quarter Market significance: moderateMarket significance: moderate

Comprehensive measure of labor cost. But Comprehensive measure of labor cost. But published only quarterly. published only quarterly.

Website: Website: http://http://www.bls.gov/ect/#overviewwww.bls.gov/ect/#overview

What is ECI?What is ECI?

A measure of the change in the cost of A measure of the change in the cost of labor, free from the influence of labor, free from the influence of employment shifts among occupations and employment shifts among occupations and industries.  industries. 

It is the most comprehensive measure of It is the most comprehensive measure of labor costs and their growth rate.labor costs and their growth rate.

It measures changes in labor costs for It measures changes in labor costs for money wages and salaries and noncash money wages and salaries and noncash fringe benefits in nonfarm private industry fringe benefits in nonfarm private industry and state and local governments for and state and local governments for workers at all levels of responsibility. workers at all levels of responsibility.

What is in the ECI report?What is in the ECI report?

Shows changes in wages and salaries and Shows changes in wages and salaries and benefit costs, as well as changes in total benefit costs, as well as changes in total compensation compensation

Presents data as a total for all workers and Presents data as a total for all workers and separately for private industry and for separately for private industry and for state and local government workers state and local government workers

Reports changes by industry, occupational Reports changes by industry, occupational group, union and nonunion status, census group, union and nonunion status, census region and division, and region and division, and metropolitan/nonmetropolitan status metropolitan/nonmetropolitan status

What is in the ECI report?What is in the ECI report?

Provides seasonally adjusted and Provides seasonally adjusted and unadjusted data unadjusted data

Presents historical data on changes Presents historical data on changes in labor costs in labor costs

Uses fixed weights to control for Uses fixed weights to control for shifts among occupations and shifts among occupations and industries industries

Why is ECI important?Why is ECI important? ““Inflation rate of the private-sector ECI has Inflation rate of the private-sector ECI has

roughly parralled the overall inflation rate, roughly parralled the overall inflation rate, measured by the GDP price index, since measured by the GDP price index, since 1980” (1980” (Business Economics, Business Economics, July 1999).July 1999).

Unlike the Average Hourly Earnings Unlike the Average Hourly Earnings measure of wage inflation, the ECI is not measure of wage inflation, the ECI is not affected by shifts in the composition of affected by shifts in the composition of employment between high-wage and low-employment between high-wage and low-wage industries or between high- and low-wage industries or between high- and low-wage occupations within industries.wage occupations within industries.

Why is ECI important?Why is ECI important? Data uses in private and public sectors:Data uses in private and public sectors:

For both sectors:For both sectors:Evaluate benefit packages; Evaluate benefit packages; Analyze contract settlements; Analyze contract settlements;

Private sector:Private sector:Aid collective bargaining negotiations; Aid collective bargaining negotiations; Guide decisions in business or plant location; Guide decisions in business or plant location; Assist in wage and salary administration; Assist in wage and salary administration; Adjust wages in long-term contracts. Adjust wages in long-term contracts.

Public sector:Public sector:Formulate and assess public policy; Formulate and assess public policy; Aid collective bargaining negotiations; Aid collective bargaining negotiations; Index Medicare payments; Index Medicare payments; Formulate monetary policy. Formulate monetary policy.

Keys to Interpreting the DataKeys to Interpreting the Data

Since bonuses & commissions are Since bonuses & commissions are included in data, there needs to be included in data, there needs to be caution when interpreting Total caution when interpreting Total Compensation. Compensation.

Rebased in Dec 2005 to 100. Rebased in Dec 2005 to 100. Sample errors exist since the data Sample errors exist since the data

have been derived from sample have been derived from sample surveys.surveys.

ECI – by RegionECI – by RegionOver-the-year percent change in the ECI for total compensation in the regions, private

industry workers, 2002-2007

Latest Release - March 2007Latest Release - March 2007

    Total compensation costs for civilian Total compensation costs for civilian workers increased 0.8 percent from workers increased 0.8 percent from December 2006 to March 2007, seasonally December 2006 to March 2007, seasonally adjusted, the Bureau of Labor Statistics of adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported the U.S. Department of Labor reported today.  This was about the same as the 0.9 today.  This was about the same as the 0.9 percent increase for the September to percent increase for the September to December 2006 period.  December 2006 period. 

Wages and salaries rose 1.1 percent for the Wages and salaries rose 1.1 percent for the three-month period, compared with 0.7 three-month period, compared with 0.7 percent for the previous period.  percent for the previous period. 

Latest Release - March 2007Latest Release - March 2007

Increases in wages and salaries Increases in wages and salaries accounted for 84 percent of the rise accounted for 84 percent of the rise in compensation costs for civilian in compensation costs for civilian workers from December 2006 to workers from December 2006 to March 2007, not seasonally March 2007, not seasonally adjusted.  adjusted. 

Among private industry workers, Among private industry workers, wages and salaries comprised 96 wages and salaries comprised 96 percent of the compensation gain.  percent of the compensation gain. 

Latest Release - March 2007Latest Release - March 2007

In state and local government, wages In state and local government, wages and salaries accounted for 40 and salaries accounted for 40 percent of the change in percent of the change in compensation.  compensation. 

In state and local government, In state and local government, benefit increases were due primarily benefit increases were due primarily to increases in defined benefits and to increases in defined benefits and health benefits. health benefits. 

Latest Release - March 2007Latest Release - March 2007Quarterly changes, seasonally adjusted Quarterly changes, seasonally adjusted  For private industry, compensation costs For private industry, compensation costs

rose 0.6 percent, compared to 0.8 percent rose 0.6 percent, compared to 0.8 percent for the prior quarter, while state and local for the prior quarter, while state and local government increased 1.3 percent, government increased 1.3 percent, compared to 1.0 percent for the quarter compared to 1.0 percent for the quarter ended December 2006.   ended December 2006.   

For private industry workers, wages and For private industry workers, wages and salaries increased 1.1 percent, up from 0.8 salaries increased 1.1 percent, up from 0.8 percent.  In state and local government, percent.  In state and local government, the increase was 0.9 percent, up from 0.8 the increase was 0.9 percent, up from 0.8 percent in the prior quarter.percent in the prior quarter.

Historical DataHistorical Data

Wages & SalariesWages & Salaries

Total BenefitsTotal Benefits

Total CompensationTotal Compensation

How ECI affects the stock How ECI affects the stock marketmarket

A sustained increase in labor costs is A sustained increase in labor costs is bearish for the stock market. If wages and bearish for the stock market. If wages and benefits climb faster than productivity, benefits climb faster than productivity, business costs swell, which then business costs swell, which then jeopardizes corporate profits. jeopardizes corporate profits.

Moreover, it can compel the Fed to act. Moreover, it can compel the Fed to act. How quickly this all unfolds depends on How quickly this all unfolds depends on where the economy stands in the business where the economy stands in the business cycle and how vulnerable it is to an cycle and how vulnerable it is to an outbreak of inflation. outbreak of inflation.

The U.S. employment cost index for the first The U.S. employment cost index for the first quarter of 2007 rose 0.8% for overall quarter of 2007 rose 0.8% for overall compensation costs to civilian workers, with compensation costs to civilian workers, with the wages and salaries component up 1.1% the wages and salaries component up 1.1% and benefits rising only 0.1%.and benefits rising only 0.1%.

Economists' expectations had centered on a Economists' expectations had centered on a 1.0% increase in overall compensation costs.1.0% increase in overall compensation costs.

The civilian workers wages and salaries The civilian workers wages and salaries category rise was the largest since a 1.3% category rise was the largest since a 1.3% gain in the first quarter of 2001, while the gain in the first quarter of 2001, while the benefits rise was the smallest since a similar benefits rise was the smallest since a similar 0.1% gain in the first quarter of 1999.0.1% gain in the first quarter of 1999.

Data AnalysisData Analysis

Data AnalysisData Analysis

"Employment costs still look fairly "Employment costs still look fairly contained, which should provide Fed contained, which should provide Fed officials with some comfort. Wages officials with some comfort. Wages and salaries, however, are still seeing and salaries, however, are still seeing some modest upward pressure given some modest upward pressure given the tight labor market. The message is the tight labor market. The message is that we are not out of the woods yet in that we are not out of the woods yet in regard to inflation concerns” (Russell regard to inflation concerns” (Russell Price, H&R Financial Adivsors).Price, H&R Financial Adivsors).

The ECI rose 0.8% in the first quarter The ECI rose 0.8% in the first quarter on a 1.1% gain in wages and salaries on a 1.1% gain in wages and salaries due to still relatively tight labor due to still relatively tight labor markets. Benefits costs rose only markets. Benefits costs rose only 0.1% and were up 3.1% year/year, a 0.1% and were up 3.1% year/year, a deceleration from the 3.6% year/year deceleration from the 3.6% year/year gain in the fourth quarter. (Kevin gain in the fourth quarter. (Kevin Kastner, Kastner, Market News InternationalMarket News International))

Data AnalysisData Analysis

Data AnalysisData Analysis