U.S. Employment Costs Rise 0.8% In The Fourth Quarter

ECONOMIC REPORT: U.S. Employment Costs Rise 0.8% In The Fourth Quarter

Wed, Jan 31 2007, 16:45 GMT
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ECONOMIC REPORT: U.S. Employment Costs Rise 0.8% In The Fourth Quarter

By Greg Robb

WASHINGTON (Dow Jones) -- The costs of employing a worker in the United States moderated in the fourth quarter, the Labor Department reported Wednesday.

Employment costs rose 0.8% in the fourth quarter, down from a 1.0% gain in the third quarter. This is the slowest pace since the first quarter of last year.

Wage costs increased 0.8% in the fourth quarter, also the slowest pace since the first quarter of 2006. Benefit costs rose 1.1%.

The increase in the employment costs index was below the expectations of Wall Street economists surveyed by MarketWatch, who forecast a 1.0% gain.

In the third quarter, wage costs had risen 1.0%, with wages up 0.9% and benefits rising 1.1%.

For all of 2006, the employment cost index increased 3.3%, the fastest since 2004. The ECI increased 3.1% in 2005.

Wages increased 3.2% in 2006, up from 2.6% in 2005. Benefit costs rose 3.6%, the lowest annual pace since 1999.

Employment costs are a major cause of worry for the Fed, which theorizes that inflation can only be sustained if workers force their bosses to pay higher compensation, which is then passed on to customers in the form of higher prices.

The Federal Open Market Committee is expected to hold overnight interest rates steady at the end of its meeting later on Wednesday.

But economists said the ECI report would support the Fed continuing to say that inflation is the greatest risk facing the economy.

Real -- that is, inflation adjusted - compensation rose 0.8% in 2006.

Real wages rose 0.7% in 2006 and inflation adjusted benefit costs increased 1.0%.

In the fourth quarter, private industry compensation costs rose 0.8%, with wages up 0.7% and benefits rising 1.0%. For government workers, compensation costs increased 1.0%, with wages rising 0.8% and benefits increasing 1.4%.

The employment costs index is a broader measure of compensation costs than the separate series of data on average hourly wages, which cover only about 80% of U.S. workers.

The average hourly earnings data has been much stronger than the ECI report. Over the past 12 months, average hourly earnings have increased at 4.2%, the fastest growth since late 2000.

J. Alfred Broaddus, the former president of the Richmond Fed bank, said in an interview with MarketWatch that the ECI is a better measure of labor costs because the average hourly earnings data is tilted towards specialized workers.

The ECI covers more workers than the average hourly earnings series and covers a greater range of compensation costs, including fringe benefits, bonuses and perks.

In a separate report, the Commerce Department said fourth quarter gross domestic product rose 3.5%, much stronger than economists had expected.