The Sin of Wages

Weighing productivity and compensation data in the wake of a bullish ECI report.
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Feckless

JACKSON HOLE, Wyo. -- The

employment cost index

(or ECI) measures the change in the cost of labor. It reflects changes in wages and salaries (roughly three-fourths of the index) and changes in employer costs for employee benefits (the other fourth).

The ECI rose 2.7% in 1995 and then accelerated for three straight years. Numbers

released today showed that it was rising at a 3.0% rate as of the first quarter against a 3.4% increase last year.

The wages and salaries portion of the ECI accelerated for three straight years beginning in 1994 and then decelerated between 1997 and 1998. Numbers released today showed that its deceleration continued through the first quarter.

The benefit-cost portion of the ECI decelerated for six straight years beginning in 1990 and then accelerated between 1996 and 1998. Numbers released today showed that it was rising at a 2.3% rate as of the first quarter against a 2.6% increase last year.

These numbers raise two questions.

Question 1

Will the benefit-cost portion of the ECI continue to show deceleration?

Your guess is as good as mine. The

consumer price index for medical care

tracks ECI benefit costs as well as anything (note that medical-care costs account for just over a fifth of all benefit costs). It rose 2.8% in 1997 and 3.4% in 1998, and as of March it was rising at a 3.5% rate; no deceleration there. Could it begin to show such as early as next month (when CPI numbers for April are released on May 14)? Sure thing. But for now it doesn't seem unreasonable to demand that the benefits portion of the ECI produce at least one more deceleration data point before we conclude that a two-years-running acceleration in benefit costs has suddenly reversed for no apparent reason.

(Also, keep this in mind. The benefits portion of the ECI rose a tiny 0.3% during the first quarter. Since 1987, first-quarter increases that small have given way to second-quarter increases that average 0.7%. The

BLS

may well have a seasonal adjustment problem here, which leans in favor of the tiny first-quarter increase going down as an exception rather than marking a new rule.)

Question 2

Is wage growth really decelerating?

Given that the wages and salaries portion of the ECI and the average hourly earnings series from the

employment report

do not include stock options, there is a good argument to be made that neither of these popular measures of wage growth accurately reflect what's going on in the real world.

(As an aside, answer this question (and ask it of your friends): Was your 1998 raise (salary, bonus, options) bigger than your 1997 raise? The two aforementioned series both say the answer is No.)

The measure of compensation presented in a table in this column on

Monday does include stock options, and it's probably wise to favor that measure for two reasons.

It comes from the same data that is used to produce the productivity numbers. And if the bigger productivity numbers we've seen over the past three years are to be believed, then so too should the bigger hourly compensation numbers that go with them.

Greenspan's favorite productivity numbers are the ones that come from the nonfinancial corporate sector. Those are the ones that currently show productivity rising at a 2.8% rate; they're also the ones that currently show compensation rising at a 4.3% year-on-year rate.

Not that it matters too much; "pre-emptive" is no longer a part of the Fed's vocabulary. In the absence of clear evidence of a material acceleration in the core price measures, no one need fret about a higher

fed funds rate

even if that measure of compensation accelerates by another percentage point.

But do keep in mind that a rate decrease is even more unlikely.

Side Dish

Best ice cream?

Dreyers.

Breyers.

Eskimo Pie.

Ben & Jerry's.

Haagen-Dazs.