Wage Gains for Private-Sector Workers Hit 10-Year High

by Felicia Bechtoldt

November 19, 2018

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 for the following year. That raise might not only be about your job performance; it’s likely also tied to something called the employment cost index.

The employment cost index 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; legally required benefits, such as Social Security and Medicare; paid leave; retirement benefits; and supplemental pay.

Private-sector employers in the U.S. saw an increase of 2.9 percent in compensation costs for the 12-month period ending in September 2018. Much of the increase in compensation costs is associated with wage growth. Over the year, wages and salaries paid to private-sector workers rose 3.1 percent. This was the fastest increase in wage growth in a decade. The costs of benefits rose 2.5 percent for the 12-month period ending in September 2018. Health benefits, which are included in benefits, rose 1.9 percent.

In the private sector, company executives and human resource professionals use the employment cost index 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 employment cost index to compare employee compensation costs relative to their industries.
Among industries, the highest wage growth occurred in transportation and warehousing (+4.3%), leisure and hospitality (+3.8%), and retail trade (+3.6%).

Among occupations, wages increased the most in sales and related occupations (+4.0%) and service occupations (+3.8%). The lowest wage growth was in installation, maintenance, and repair occupations (+2.1%).

For state and local government workers, much of the increase in compensation costs (+2.5%) was associated with the increase in benefits costs and not wage growth. State and local government workers saw higher benefits costs (+3.1%), but lower wage growth (+2.3%) compared with their private-sector counterparts.

Wage growth for state and local government workers hasn’t yet returned to the pre-recession levels. Since the recovery began in 2010, wage growth for state and local government workers averaged 1.5 percent and is well below its 2001 to 2007 average growth rate of 3.0 percent. Wage growth for state and local government workers was higher than for private-sector workers prior to the recession and lower after the recession.
Increases in benefits costs for both government and private-sector employees have not returned to pre-recession levels. The increase in benefits costs for government employees averaged 3.0 percent after the recession and was below the pre-recession average growth rate of 5.8 percent. Private-sector employees saw an average increase of 2.3 percent, well below the pre-recession average of 4.6 percent.

The employment cost index 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 employment cost index also affects union collective bargaining agreements and contracts.

Institutions like the Federal Reserve use the employment cost index to determine the health of the labor market. Investors watch the employment cost index 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.

Employment cost index data is available from the U.S. 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, visit the U.S. Bureau of Labor Statistics’ website.


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