Is the long-beleaguered American worker finally starting to see some significant compensation benefits from an unemployment rate that’s been falling toward historic lows? Some data that provides possibly the most important evidence came out this morning, and the answer is a firm “Maybe.”
I’m talking about the Labor Department’s Employment Cost Index (ECI) – but not the series that usually attracts the most attention, which isn’t adjusted for inflation. What’s not widely known is that Labor also puts out real ECI reports, and the latest paints to an unusually ambiguous “glass half empty-half full picture.” Not to mention how hazardous it always is to draw conclusions over short-term changes.
To remind, the ECI arguably is a better gauge of worker pay since it counts not only hourly wages but benefits. And as usual, we’ll focus on private sector workers. (I don’t bother with government workers, since their compensation largely reflects politicians’ decisions, not economic fundamentals.)
Optimists will note that the new fourth quarter, 2017 report shows that the private sector ECI rose sequentially by 0.48 percent. That’s the biggest such percentage increase since the fourth quarter, 2015’s 0.97 percent, and sure beats the heck out of the third quarter’s 0.10 percent dip.
But pessimists will note that that 2015 improvement vanished almost instantly. As for the annual change, the 0.48 percent rise was nothing special. It beat the third quarter’s 0.29 percent, but trailed the second quarter’s 0.68 percent.
Also supporting the pessimists’ case has been the inflation-adjusted ECI’s performance during the current economic recovery versus that for the previous expansion. (The real ECI data set only goes back to 2001).
Since the second quarter of 2009, constant-dollar private sector employment costs are up 4.20 percent. That’s actually better than the 2.36 percent achieved during the previous recovery. But that expansion lasted only six years (from the fourth quarter of 2001 through the fourth quarter of 2007). The current recovery is more than eight years old. Over its first six years, after-inflation employment costs were up just 1.70 percent.
Manufacturing’s real ECI performance was somewhat better. The fourth quarter’s 0.57 percent rise was the best sequential advance since the third quarter of 2015 (0.70 percent). But the 2017 annual increase – also 0.57 percent) was the highest only since the third quarter of 2016 (0.99 percent).
The most significant sign of progress in industry comes from the recovery-to-recovery comparison. During this expansion, price-adjusted employment costs for manufacturing have risen by 5.65 percent. That’s considerably faster than the 1.99 percent during the previous recovery, as is the current recovery’s advance during its first six years – 2.98 percent. So maybe these latest gains stand a better chance of lasting than those of their private sector counterparts?
But there’s no shortage of reasons for continued uncertainty. A bunch of minimum wage hikes across the country have kicked in this month, which should influence the next set of real ECI data. The new business tax cuts may help as well. And don’t forget the certainty of rising federal budget deficits, either with or without a big boost in infrastructure spending. Hanging over the future also, however, is the strong likelihood of continued Federal Reserve monetary tightening – and how interest rate hikes may be interpreted by businesses. All of which means that the next real ECI report – due out at the end of April – will merit unusually close scrutiny.