Employment Cost Index report for the 3^rd Quarter 2021

The Q3 Employment Cost Index data, released this morning, revealed continued pressure on wages amid labor shortages. These trends may result in upward pressure on consumer prices in the coming months.

Wages and salaries for private industry workers increased at a 6.5 percent annualized rate in the three-month period ending in September, a steep increase from an already high 3.9 percent in the previous three months. Over the last six months, the annualized growth rate was 5.2 percent. Services (9.0 percent over six months) and production, transportation and material moving (6.6 percent) occupations led the way, as tight labor markets continue to increase wages in those areas (see chart below). Even management and professional occupations, which have been less impacted by pandemic induced labor shortages, saw wage growth of 4.6 percent after several years of wage growth below 3 percent.

This quarter’s data is also marked by an expansion of benefits provided to workers, possibly reflecting firms’ increased efforts at retaining their existing workforce. The monetary value of benefits increased by an annualized rate of 2.7 percent over the six-month period ending in September, with production, transportation and material moving workers (4.0 percent) and manual service workers (3.9 percent) seeing the largest increases.

Tight labor markets in manufacturing, in-person services and transportation continue to contribute to rapid growth in compensation. Labor supply constraints remain, and it is uncertain whether they will subside by the end of the year. Increased vaccination rates and vaccine mandates coming into effect should alleviate hesitation to work due to health risks for some. However, these mandates could also push the vaccine hesitant out of the labor force. The expiration of pandemic-related unemployment assistance may result in more people actively seeking work. On the other hand, many older workers who left the labor force since the start of the pandemic may never return and choose to retire instead.

Overall, we could see some alleviation in tight labor markets if workers return to the labor market in Q4 2021. After the bulk of labor market re-entrants are hired, however, the labor market could further tighten again by early or mid-2022, leading to further wage pressures.