Employment Cost Trends Nationwide

by Felicia Bechtoldt

July 25, 2017

You feel like your year-end performance review is going well. Your manager values your contribution to your organization and tells you how well you’ve done this year. The exciting part is that your manager gives you a raise in the next year. That raise might not only be about your job performance; it’s likely also tied to something called the Employment Cost Index (ECI).

The ECI measures the changes in the compensation costs that employers pay to their employees and indicates how labor costs are changing and how the economy is performing. About 70 percent of compensation costs are wages and about 30 percent are benefits. Benefits include employers’ costs for:

  • Employees’ insurance – health, life,  short-term disability, and long-term disability
  • Legally required benefits – Social Security, Medicare, workers’ compensation, and federal and state unemployment insurance
  • Paid leave – vacations, holidays, sick leave, and personal leave
  • Retirement benefits
  • Supplemental pay – bonuses, holiday, weekend or overtime pay, and shift differentials.
In the private sector, company executives and human resource professionals use the ECI to determine how much of a raise they should give to their employees to stay competitive in the labor market. For example, if wages have gone up by 1.5 percent over the year, businesses can decide to give everyone a raise of 1.5 percent or more to retain and attract quality employees. Company executives use the ECI to compare their own compensation costs relative to their industries. Investors watch the ECI for inflationary insights. Compensation costs are a large share of a company’s cost to produce a product or deliver a service, and rising compensation costs are usually passed on to consumers. 
In the public sector, institutions like the Federal Reserve use the ECI to determine the health of the labor market. The ECI affects the wages of U.S. military service members. According to Title 37 of the U.S. Code, each year service members are mandated to receive a pay raise that matches the wage growth in the private sector. The ECI also affects union collective bargaining agreements and contracts.

In the U.S., compensation costs for civilian workers increased 2.4 percent for the 12-month period ending in March 2017, up from 1.9 percent a year before, according to the U.S. Bureau of Labor Statistics. Civilian workers include all private sector, state, and local government workers. Federal government, military, and agricultural workers are not included in the definition of civilian workers.
Wages for civilian workers increased 2.5 percent for the 12-month period ending in March 2017. This was higher than the 2.0 percent increase a year before. The cost of benefits rose 2.2 percent, up from last year’s increase of 1.7 percent.

Private-Sector Workers vs. Government Workers

Compensation costs for private-sector workers had lower increases than those for state and local government workers. Private-sector employees saw an increase of 2.3 percent in compensation costs versus 2.6 percent for state and local government workers. Compensation costs for private-sector workers in the U.S. saw lower increases relative to their counterparts in the Pacific region (+3.0%), which includes Oregon, Washington, California, Alaska, and Hawaii.

Much of the increase in compensation costs for private-sector workers is associated with wage growth and not an increase in benefits costs. Over the year, private-sector workers had 2.6 percent wage growth and a 1.9 percent increase in benefits costs. Health benefits, which are included in benefits, rose 1.3 percent over the year, lower than the increase of 3.3 percent a year before. For state and local government workers it was the opposite; much of the increase in compensation costs is associated with the increase in benefits costs and not wage growth. Wage growth was 2.2 percent and the increase in benefits costs was 3.1 percent over the year.
The wage growth for private-sector workers was lower than state and local government workers prior to the recession and higher after the recession. The wage growth for both private-sector workers and government workers has not returned to pre-recession levels. Since the recovery began in 2010, wage growth for private-sector workers averaged 2.0 percent and is below its 2001 to 2007 average growth rate of 3.0 percent. For government workers, the average wage growth was 1.4 percent, well below its pre-recession average growth rate of 3.0 percent.

Increases in benefits costs for private-sector employees and government workers have also not returned to pre-recession levels. The increase in benefits costs for private-sector employees averaged 2.2 percent after the recession, below the pre-recession average growth rate of 4.6 percent. Government workers saw an average increase of 3.0 percent in benefits costs after the recession, well below the pre-recession average of 5.8 percent.

Over the year, the highest wage growth in the private sector occurred in service occupations (+3.7%) and transportation and material moving occupations (+3.7%). The lowest wage growth was in professional and related occupations (+1.7%) and installation, maintenance, and repair occupations (+1.9%).
Among industries, wages increased the most in accommodation and food services (+4.8%), transportation and warehousing (+3.6%), and retail trade (+3.6%). The lowest wage gains were in administrative and support and waste and management and remediation services (+0.7%). This industry includes firms that provide support for the day-to-day operations of other organizations, such as office administration, hiring personnel, security and surveillance services, cleaning, and waste disposal services.

Union workers in the private sector had higher wage growth and slightly lower increases in benefits costs than their nonunion counterparts. Over the year, union workers saw wage growth of 1.7 percent compared with 1.5 percent for nonunion workers and an increase in benefits costs of 1.8 percent compared with 1.9 percent for nonunion workers.

Employment cost index data are available from the Bureau of Labor Statistics’ National Compensation Survey, which collects data on wages and benefits in nonfarm businesses and state and local governments. To learn more about wage growth and benefits costs for U.S. workers, visit the Bureau of Labor Statistics’ Employment Cost Trends site.

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