Commentary on today’s U.S. Bureau of Labor Statistics Employment Cost Index

The Employment Cost Index report shows that growth in compensation remains strong. In Q3 2022, compensation for private industry workers grew by 5.2 percent over the past year, slightly down from 5.5 percent in the previous quarter. While compensation gains eased from the previous quarter, compensation growth continues to be historically high.

The increasing likelihood that the US will fall into recession hasn’t deterred employers from raising wages and benefits for workers. Labor shortages across many industries and jobs are driving these rapid pay increases as employers are struggling with recruitment and retention. Workers have more negotiating power. While these wage gains are great for workers, rapid inflation is limiting workers’ growth in purchasing power.

Wage growth may have peaked; indeed, it may even further decelerate over the coming year as the projected upcoming recession would reduce the demand for workers. In addition, with the unemployment rate projected to rise to about 4.5 percent in 2023, labor supply problems would also slightly ease. This may temporarily alter the disparity between strong labor demand and constrained labor supply with wage growth possibly decelerating amid cooling in the US labor market. Slower growth in compensation may also lower inflation as both feed into each other.

While wage growth may decelerate, it will likely remain higher than 3 percent as 85% of CEOs expect to increase wages by 3% or more over the next year according to The Conference Board CEO Confidence Survey. This means that wage growth may continue to be stronger than the 2 to 3 percent growth observed during the 2010s.

But for now, growth in wages and benefits remains strong. Wages and salaries for private industry workers increased by 5.3 percent over the past year, down from 5.7 percent in Q2 2022. Benefits increased by 5.0 percent, down from 5.2 percent in Q2 2022.

Wages for manual services workers (e.g., food services, cleaning, personal care) are rising the fastest (8.1 percent over the past year). Nevertheless, all occupation groups are showing elevated wage growth compared to 2019. Transportation and production workers wages grew by 5.9 percent over the past year. This was 5.9 percent for sales and office workers, 4.7 percent for construction, natural resource, and maintenance workers, and 4.1 percent for management and professional workers.