Employer Cost Inflation Easing a Bit This Year

The government's comprehensive Employment Cost Index (ECI)—which measures changes in wages, salaries, and employer costs for employee benefits—increased by 0.9% during the second quarter of 2001.

The June 2001 ECI was 3.9% higher than in June 2000, so through the middle of this year labor market inflation remained at a level about twice the rate of product price inflation (as measured by the Labor Department's consumer, producer, and import price indexes). But with unemployment now on a clear upward trajectory, and with the economy's prospects for any growth at all over the balance of 2001 dimmed by the events of September 11, there's little question that both wage and product price inflation will move sharply lower during the next six to nine months.

Although the ECI report suggests that inflation in labor market costs continues to be a more serious concern for American businesses than average price increases for most industrial material and capital goods, there's a broad consensus of opinion that labor cost inflation will ease dramatically in the months ahead. Higher unemployment rates and slower job growth are clear signs that labor market conditions aren't nearly as tight now as they have been during the past several years, and that significant upward pressure on wages and benefits during the next year or so will apply to only the most skilled occupations.