Long Term Perspective

The employment cost index is the most comprehensive measure of compensation costs faced by employers. Wages and salaries account for the bulk of the index, whereas benefits costs account for about one-third of compensation costs. Fed officials monitor this indicator because they believe that accelerating pressures on compensation costs will eventually lead to increases for prices of consumer goods and services.

The employment cost index was relatively stable between 2000 and 2004; moderated somewhat in 2005 and 2006 as benefits costs have fallen off from their highs; but firmed somewhat over 2006 and the first half of 2007 due to tight labor markets. Wages & salaries moderated from 2000 through 2002, hovered in a tight range in 2003 and 2004, and picked up in 2005, 2006, and into 2007.

Short Term Perspective

The employment cost index increased 3.3 percent annualized in the third quarter of 2007 relative to a year earlier. At the same time, wages and salaries aslo increased 3.3 percent, a marginally slower pace compared to the previous quarter. Benefit costs were up 3.4 percent in Q2 relative to a year ago – showing a significant moderation from previous quarters. Fed officials are concerned about wage pressures because labor markets have remained tight in the past year and the total employment cost index has firmed over the last four quarters despite moderation in benefits cost inflation.