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US Key Economic Indicators

Employment Cost Index

  • Importance (A-F): This release merits a B+.
  • Source: U.S. Department of Labor, Bureau of Labor Statistics
  • Release Time: 8:30 ET, near the end of the first month of the quarter for the prior quarter.
  • Raw Data Available At:

In Brief

Since the employment cost index was mentioned by Fed Chairman Greenspan in July 1996, it has risen into the upper echelon of economic reports in the eyes of the bond market. Its lagging nature still leaves it as a less timely indicator of employment cost trends than the monthly hourly earnings data in the employment report. But the ECI does add something to this picture: an adjustment for shifting employment between industries, and a look at benefit costs. These additions are interesting, but typically do not alter the view of the employment cost picture which was left by hourly earnings. ECI will be much less closely watched during periods when wage inflation is not a serious market concern.

The market focusses on the quarter/quarter and year/year changes in each of three categories: total employment costs, wages and salaries, and benefit costs. The figures are sometimes skewed by large year-end bonuses in the financial industry; analysts often exclude the sales commission component of wages and salaries to adjust for this factor.

In Depth
The Employment Cost Index (ECI) is designed to measure the change in the cost of labor.

The ECI compensation series includes wages and salaries and employer costs for employee benefits. The sum of the change in these two components equals the change in total compensation.

The Federal Reserve Bank of Cleveland aptly describes this aspect of the employment cost index thus: "The ECI is the best measure of compensation (wages and benefits) growth available." adds this extension: The usefulness of the ECI lies in its ability to tell us whether wage and/or benefit-cost growth appears excessive and whether compensation is growing faster than inflation.

Since Fed Chairman Alan Greenspan mentioned the ECI in July 1996 it has risen into the upper echelon of economic reports in the eyes of the market. Prior to 1996 it did not stand out on the economic calendar, and when it was released only market economists and labor analysts were there to greet it. It is most important during the latter stages of the business cycle and, not surprisingly, it takes on a much less prominent role when wage inflation is not a serious market concern.

The ECI, which is released on a quarterly basis, is a less timely indicator of employment cost trends than the hourly earnings data in the monthly employment report. Hourly earnings figures for any given month are available during the first week of the next month, while ECI numbers for any given quarter are not available until a month after the quarter ends.

The ECI has two advantages over the hourly earnings series.
  1. It includes benefits, the non-wage component of employment costs.
  2. It is free from employment shifts among occupations and industries.

covered by the ECI include paid leave, insurance benefits, and retirement and saving benefits. Because these account for roughly 30% of total employment costs, their absence in the monthly earnings series leaves us with an incomplete picture.

To illustrate the second advantage we will lift another description from the Cleveland Fed: "Like the consumer price index (CPI), the ECI relies on a fixed basket of items--in this case, occupations. This prevents shifts in the occupational composition of the workforce from appearing as wage gains, as they do in average hourly earnings data. Because the ECI includes overtime payments as a fixed increment to wages, short-term increases in overtime will not alter the index."

In simpler English this means that within the ECI framework a) a rise in the number of high-wage workers (miners, say) at the expense of low-wage workers (retail clerks, say) will not appear as an increase in aggregate wages, and b) a temporary increase in overtime pay in a certain sector (manufacturing, say) will not appear as an increase in aggregate wages. Both of those forces would show up as an increase in the hourly earnings series, however, and that is why Alan Greenspan and other Fed members consider it an inferior measure of wage growth.

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