Employment Cost Index Shows Modest Quarterly Rise

Despite the tightest labor market in nearly a quarter century, American workers got only modest increases in their wages and benefits in the spring as inflation remained well contained.

The Commerce Department said Tuesday that its employment cost index--which measures wages and fringe benefits--rose just 0.8% in the April-June quarter, little changed from a 0.6% increase in the first quarter.

For the last 12 months, wages and benefits have risen 2.8%, a bit less than the 2.9% increase for the 12 months ending in June 1996.

The second quarter increase in total compensation costs included a 0.8% rise in wages and salaries that compared with a 0.9% rise in the January-March quarter.

Benefit costs rose by 0.6% in the second quarter after a minute 0.1% rise in the first quarter.

While smaller pay increases don’t make workers happy, economists see them as part of a virtuous cycle that is helping prolong the current recovery.

A lack of significant upward pressure on wages has kept inflation at bay and allowed the Federal Reserve Board to tolerate much faster economic growth rather than stepping in to cool things off with interest-rate increases.

“This is the heart of the ‘new economy’ argument that a very strong economy can coexist with low inflation and low interest rates,” said Mark Zandi, economist at Regional Financial Associates.

What’s more, with inflation extraordinarily subdued this year, “real” or after-inflation wages are improving for many Americans, even though nominal increases are small.

Still, many economists believe that labor markets cannot remain as tight as they are currently without eventually boosting wage pressures, and they note scattered signs that companies are already paying higher wages to fill skilled positions.

“At this point there are no signs of accelerating wage and benefit costs. But with job markets as good as they are and demand for labor so strong, eventually we will see an acceleration,” said Nicholas Perna, chief economist at Fleet Financial Group in Hartford, Conn.

Even so, “right now we are the envy of the world. Where else can you find good growth, low inflation and a balanced budget?”