Importance: ****

Definition: It is the most comprehensive measure of labor costs and their growth rate. As such, it signals wage inflation and is closely watched by the Fed. It measures changes in labor costs for money wages and salaries and noncash fringe benefits in nonfarm private industry and state and local governments for workers at all levels of responsibility. Unlike the Average Hourly Earnings measure of wage inflation, the ECI is not affected by shifts in the composition of employment between high-wage and low-wage industries or between high- and low-wage occupations within industries.  Thus, the ECI represents labor costs for the same jobs over time.

 
Related Indicators: Average Hourly Earnings.

Source: Bureau of Labor Statistics in the U.S. Department of Labor
 
Frequency:  Employment Cost Index is published quarterly

Availability: The last week of the month immediately following the quarter to which they refer

Direction: Pro-cyclical

Timing: Coincident

Volatility: Modest
 
Likely Impact of Financial Markets:

Interest Rates: Larger-than-expected increases are considered inflationary causing  interest rates to rise. The bond market views an increase in ECI as leading to labor cost inflation that is inflationary if in excesss of productivity growth. A large rate of growth of ECI also make it more likely that the Fed will increase the Fed Funds rate that is also bearish for the bond market.

Stock Prices:  Higher wage inflation is bearish for the stock market because high wage growth may reduce profits, increase long-term interest rates and lead the Fed to increase the Fed Funds rate to stem inflation.

Exchange Rates: Uncertain. High wage inflation leads to high inflation and loss of competitivenss. However, it also leads to higher nominal interest rates and real ones too if rthe Fed tightens; such an increase in interest rates would tend to strenghten the exchange rate.

Analysis of the Indicator:
High rates of growth of the ECI (wage inflation) would lead to higher inflation if the wage growth is above productivity growth. A related measure of wage cost growth closely watched by the Fed is the Average Hourly Earnings. Compared to the ECI that is published only quarterly, the strenght of the average hourly earnings measure it that is published monthly and is an early indicator of wage growth in the previous month. However, compared to the ECI,  AHE has several weaknesses. First,  the ECI is abroader measure of labor costs as it includes wages and salaries as well as benefits costs (non cash fringe benefits such as medical benefits).  Second, unlike the AHE,  the ECI is not affected by shifts in the composition of employment between high-wage and low-wage industries or between high- and low-wage occupations within industries. Thus, the ECI represents labor costs for the same jobs over time. Instead, average hourly earnings may increase bacause more workers are employed in better skills jobs that pay higher high hourly wages rather than beacuse the same jobs pay higher hourly wage. The first effect due to a change in the distribution of labor across different jobs is not inflationary; however, kit leads to an increase in the AHE but not of the ECI. Third,  unlike the ECI, AHE increase also due to transitory increases in wage costs that are not causes of permanent higher wage costs; for example, increased use of transitory overtime that is usually paid with higher hourly wages leads to an increase in AHE but not of the ECI. For all the above reasons, Greenspan and the Fed give more weight to the quarterly ECI report rather than the monthly AHE report is deciding whether wage inflation and wage costs are increasing or not.
 
WEB Links

The latest ECI data  from The Economic Statistics Briefing Room of the White House

The latest ECI report  from BLS
 
 An analysis of th 1997-Q3 report from First Union