OLMIS

by Christian Kaylor
Published Feb-5-2007

Introduction What is the Employment Cost Index? Why Bother Understanding the ECI? Adjustments to Reimbursement, Pay, and Contracts As an Economic Policy Indicator

For most businesses, wages and salaries are the biggest operating cost. Every year, wages and benefits cost more money than the year before. Knowing how much US labor costs are increasing every year is vital information for businesses wanting to remain competitive.

There are many measures of labor costs, but the measure that is widely used is the Employment Cost Index. The Employment Cost Index (ECI) is a quarterly economic series detailing the changes in the costs of labor for businesses in the United States economy. The ECI is prepared by the Bureau of Labor Statistics.

The ECI is an index, and does not measure the actual dollar costs of compensation to employers, but provides an indicator of changes and trends in compensation costs to employers over time.

The ECI is a measure of the cost of labor to employers. Included in the labor costs are wages, salaries, and benefits. Because it includes the costs of benefits in addition to wages and salaries, it provides a comprehensive measure of an important part of the cost of operating a business.

The Bureau of Labor Statistics (BLS) defines the ECI as a measure of the change in the cost of labor. It was developed in the early 1970s in response to policy makers' need for a timely, accurate, and comprehensive indicator of changes in employers' labor costs. The ECI is based on compensation cost data obtained from a survey of establishments conducted by the BLS. The survey covers all occupations within the private economy (excluding farms, households, and the self-employed) and the public sector (excluding the federal government). This broad coverage permits analysis of labor cost changes for a major portion of the U.S. economy.

A simple answer is because business groups and the government use it to determine not only the future course of economic policy but also changes in workers' compensation and other cost adjustments. The groups that use the ECI and its components range from policy makers and planners to businesses, researchers, employers, and workers. The ECI series provides a wealth of information on the composition of employee wages and benefits, as well as information for particular industries and occupations. These data are useful for analyzing changes in labor market conditions, and even in identifying broader economic trends. The ECI also has such practical uses as adjusting wages or prices in private-sector contracts for changes in the overall compensation cost, and tracking the changes in labor costs, thus helping individual businesses remain competitive.

Some private-sector firms use the ECI as a basis for or as input in adjusting salary rates. Many private employers and unions also use various ECI series in negotiations for salary adjustments.

Pay adjustments of federal government employees including House, Senate, federal judges, and senior government officials, are based largely on the ECI. Some state and local governments use the ECI for pay adjustments.

Here's one example of a more down-to-earth use of ECI. ECI data are used as an important input to determine allowable increases in hospital charges under Medicare. According to the BLS, a one percent change in the ECI has an impact of more than $250 million on certain Medicare payments. Many hospitals in several states nationwide use various ECI series to determine actual reimbursements for all "payers" other than Medicare.

For those who are in the business of formulating the country's economic policy and looking for signs of future economic changes, the ECI can help. Government agencies that use the ECI as an economic indicator are the U.S. Office of Management and Budget (OMB), the Federal Reserve Board, the Council of Economic Advisers, and the Bureau of Economic Analysis of the U.S. Department of Commerce. The OMB has designated the ECI as a principal federal economic indicator.

The Federal Reserve Board uses the ECI as a major economic indicator in determining monetary policy. Chairman of the Federal Reserve Ben Bernanke said of the ECI, "The Employment Cost Index is indispensable to understanding America's economy. It ensures the accuracy of the statistics on employers' compensation costs that we rely on for economic policy making and for successful business planning."

The Council of Economic Advisers has cited the ECI in its analyses of inflation and of productivity in the U.S. economy. The U.S. Department of Commerce, specifically the Bureau of Economic Analysis, has used the ECI state and local government wage and salary index to update the income side of the National Income and Product Accounts.

The ECI series also is used in such sophisticated economic analyses as in econometric models for economic forecasting, including forecasting the ECI values for clients' use in budgeting and other activities.

For more information and data about the ECI, visit  www.bls.gov/ncs/ect/home.htm.