Employment Cost Index
- Importance (A-F): This release merits a B+.
- Source: U.S. Department of Labor, Bureau of Labor Statistics
- Release Time: 8:30 ET, near the end of the first month of the quarter
for the prior quarter.
- Raw Data Available At: http://stats.bls.gov
Since the employment cost index was mentioned by Fed Chairman Greenspan in
July 1996, it has risen into the upper echelon of economic reports in the eyes
of the bond market. Its lagging nature still leaves it as a less timely
indicator of employment cost trends than the monthly hourly earnings data in the
employment report. But the ECI does add something to this picture: an adjustment
for shifting employment between industries, and a look at benefit costs. These
additions are interesting, but typically do not alter the view of the employment
cost picture which was left by hourly earnings. ECI will be much less closely
watched during periods when wage inflation is not a serious market concern.
The market focusses on the quarter/quarter and year/year changes in each of
three categories: total employment costs, wages and salaries, and benefit costs.
The figures are sometimes skewed by large year-end bonuses in the financial
industry; analysts often exclude the sales commission component of wages and
salaries to adjust for this factor.
The Employment Cost Index (ECI) is designed to measure the change in the cost
The ECI compensation series includes wages and salaries and employer costs
for employee benefits. The sum of the change in these two components equals the
change in total compensation.
The Federal Reserve Bank of Cleveland aptly describes this aspect of the
employment cost index thus: "The ECI is the best measure of compensation (wages
and benefits) growth available." Briefing.com adds this extension: The
usefulness of the ECI lies in its ability to tell us whether wage and/or
benefit-cost growth appears excessive and whether compensation is growing faster
Since Fed Chairman Alan Greenspan mentioned the ECI in July 1996 it has risen
into the upper echelon of economic reports in the eyes of the market. Prior to
1996 it did not stand out on the economic calendar, and when it was released
only market economists and labor analysts were there to greet it. It is most
important during the latter stages of the business cycle and, not surprisingly,
it takes on a much less prominent role when wage inflation is not a serious
The ECI, which is released on a quarterly basis, is a less timely indicator
of employment cost trends than the hourly earnings data in the monthly
employment report. Hourly earnings figures for any given month are available
during the first week of the next month, while ECI numbers for any given quarter
are not available until a month after the quarter ends.
The ECI has two advantages over the hourly earnings series.
- It includes benefits, the non-wage component of employment costs.
- It is free from employment shifts among occupations and industries.
covered by the ECI include paid leave, insurance benefits,
and retirement and saving benefits. Because these account for roughly 30% of
total employment costs, their absence in the monthly earnings series leaves us
with an incomplete picture.
To illustrate the second advantage we will lift another description from the
Cleveland Fed: "Like the consumer price index (CPI), the ECI relies on a fixed
basket of items--in this case, occupations. This prevents shifts in the
occupational composition of the workforce from appearing as wage gains, as they
do in average hourly earnings data. Because the ECI includes overtime payments
as a fixed increment to wages, short-term increases in overtime will not alter
In simpler English this means that within the ECI framework a) a rise in the
number of high-wage workers (miners, say) at the expense of low-wage workers
(retail clerks, say) will not appear as an increase in aggregate wages, and b) a
temporary increase in overtime pay in a certain sector (manufacturing, say) will
not appear as an increase in aggregate wages. Both of those forces would show up
as an increase in the hourly earnings series, however, and that is why Alan
Greenspan and other Fed members consider it an inferior measure of wage