Employer Cost Inflation Beginning to Ease a Bit

The government's comprehensive Employment Cost Index (ECI)—which measures changes in wages, salaries, and employer costs for employee benefits—increased by 0.8% during the first quarter of 2002. This figure represents the smallest quarterly gain in this total compensation measure during the past three years, and illustrates the degree to which formerly tight labor market conditions have eased during the economic slowdown.

However, the total cost of labor continues to be a major concern to employers. The March 2002 ECI was 3.9% higher than in March 2001, so labor market inflation remained at a level about twice the rate of product price inflation. In addition, benefit costs continue to rise at a much faster rate than direct (wage and salary) costs. Sharply higher health insurance and workers' compensation costs helped push overall benefit costs up 1.0% during the first three months of 2002. Although this was the smallest increase in benefits absorbed by employers over the past six quarters, it was the 11th consecutive quarter that inflation in benefit costs exceeded inflation in basic wages and salaries.

Compared to a year earlier, March 2002 benefit costs to employers were up a steep 4.9%, while the costs for direct compensation increased by only 3.5%. However, total employer cost inflation (inclusive of both wage and benefit obligations on the part of employers) as measured by the ECI has eased a bit in the early months of 2002.