Employers’ Costs for Workers Remain Muted

A moderate pickup in employers’ labor costs in the third quarter underscored a slow-moving economy that has kept inflation subdued.

The employment-cost index, a measure of labor expenses that includes pay and benefits, rose 0.4% from July through September compared to the prior three months, the Labor Department said Tuesday. Third-quarter costs were 1.9% higher from a year ago.

Economists surveyed by Dow Jones had expected third-quarter costs to rise 0.5% from the second quarter.

The report showed the pace of cost increases largely held steady during the summer as the labor market plodded ahead with slow gains in hiring. Costs are rising year-over-year at roughly the same pace as they have been throughout the four-year recovery, but the pace remains far slower than before the recession, when annual cost increases typically exceeded 3%.

Costs generally rise as hiring picks up because when the need for labor climbs, workers gain leverage in demanding higher pay.

Benefit costs rose more rapidly than wages during the summer, a development some economists predicted due to higher health-care expenses. Benefits rose 0.7% in the third quarter after rising 0.4% in the second quarter.

Wages and salaries, which account for about 70% of overall compensation costs, climbed 0.3% in the summer after rising 0.4% in the spring.

Employment costs are closely linked to inflation because increases in workers’ pay–and thus, spending power–typically guides how much businesses can raise prices for their goods and services. Inflation has been largely subdued throughout the recovery amid persistently high unemployment.

One measure of inflation — the Labor Department’s consumer-price index-showed prices up 1.2% in September from a year earlier. That’s far below the Federal Reserve‘s annual target of 2% inflation. The low inflation has reassured Fed officials as they continue an $85 billion-per-month bond-buying program designed to lift the economy.

Source: WSJ.com