Quarterly Wage Gains Bring Up the ‘I’ Word

Americans’ wages rose in the third quarter at the fastest pace in more than eight years, the government reported Thursday, prompting concerns that the Federal Reserve Board might refrain from cutting interest rates again this year.

The employment cost index--the broadest measure of wage, salary and benefit costs--rose 1% in the quarter ended Sept. 30 after rising 0.9% in the second quarter, the Labor Department said. Wages rose 1.2% in the third quarter, a pace not seen since the second quarter of 1990. Benefit costs rose 0.8%.

Rising wages put more money in workers’ pockets, which should boost spending and keep the economy expanding. Faster wage gains, though, could push inflation higher at a time when the Fed has cut interest rates to shore up financial markets.

Analysts expect the government next week to report a gain of 178,000 jobs nationwide in October, more than double September’s increase of 69,000.

The Labor Department reported that the number of U.S. workers filing for initial state unemployment benefits last week fell by 18,000 to a seasonally adjusted 301,000--the first drop in a month.

“I still think there’s some upside risk that cannot be ignored. This number is a reminder of that,” said Federal Reserve Bank of Richmond President J. Alfred Broaddus.

Some economists said that fears of rising inflation are likely to be offset by expectations of a slowdown caused by the slump in much of the world economy.

“The larger-than-expected increase in wage gains would probably be more troubling to the bond market and the Fed if there was not so much other evidence that the economy was slowing,” said Mark Vitner, economist at First Union Corp.

“If we can explain the [employment cost index] number away by telling ourselves the economy is slowing, then no problem,” said David Bloom, an economist at HSBC Securities in London, “but if not, and wage pressures intensify, the Fed will be left in a policy dilemma.”

The ECI report showed that for the 12 months ended Sept. 30, employment costs increased 3.7%, the largest since a 4% gain in the first quarter of 1992. Wages rose 4% from the 12 months ended Sept. 30, 1997, and the cost of benefits increased 2.6% over the same period.

As much as half of the wage boost, however, was spurred by sales commissions for Wall Street brokers, mortgage refinance lenders and real estate brokers, analysts said.

Employment gains have slowed so far this year from 1997, with manufacturers cutting more than 100,000 workers from their payrolls since January. Yet the unemployment rate, at 4.6%, has barely budged.

The ECI is said to be among Fed Chairman Alan Greenspan’s favorite U.S. indicators, even though he recently speculated that the data were deficient because they failed to reflect what he said were “significant” real wage gains earlier this year.