A Key Measure of Wages Grew at a Moderate Pace This Summer

A measure of pay and benefits that officials at the Federal Reserve have been watching closely as they try to gauge the heat of the labor market grew at a moderate pace over the summer.

The Employment Cost Index, a quarterly measure from the Labor Department that tracks changes in wages and benefits, climbed 1.1 percent in the third quarter of 2023 versus the prior three months. That was slightly faster than the 1 percent that economists expected and up from the previous 1 percent reading.

That pace of growth does mark a deceleration from a series of rapid quarterly gains in 2022. And on an annual basis, wage gains continue to slow: The employment cost measure rose by 4.3 percent on a yearly basis, down from the 4.5 percent reading in the previous report.

Still, the index averaged 2.2 percent yearly gains in the decade leading up to the pandemic, underscoring that today’s pace remains unusually quick. And it is notable that wage gains continue to come in strong at a time when economists had expected them to be returning to a more normal pace. The trend could present a challenge for officials at the Federal Reserve.

Rapid wage gains are good news for households, but they can spell trouble for Fed policymakers. Central bankers often worry that it will be hard to fully snuff out inflation if pay gains are climbing quickly. Companies that are paying workers higher wages are likely to try to charge more to cover their costs.

Fed officials are meeting this week to discuss what to do next with interest rates, and are widely expected to hold borrowing costs steady at the conclusion of their two-day meeting on Wednesday. Economists did not expect that to change in the wake of Tuesday’s wage data.

“It’s more about waiting for the labor market to continue to normalize,” said Oscar Muñoz, chief U.S. macro strategist at TD Securities. “It is taking longer, but I think that the Fed can be patient.”

Fed officials have already raised interest rates to a range of 5.25 to 5.5 percent, up from near-zero in March 2022, in their bid to slow inflation.

Those higher rates make it more expensive to borrow money to buy a house, purchase a car or expand a business. As companies hire less voraciously and demand wanes, wage growth should slow and companies should find it more difficult to raise prices without losing customers. That chain reaction is expected to put a lid on inflation.

But the labor market’s cool-down has been an unexpectedly bumpy one. Job gains have slowed somewhat, but they remain much faster than many economists had expected after so much Fed action.

That has left Fed officials closely watching wages.

If pay growth continues to calm even as companies hire at a solid clip, it would suggest that the continued job gains are being driven by an improving supply of applicants — and that the labor market is still slowly coming back into balance.

The logic is simple: If the job market were running hot, companies would be paying more and more as they tried to poach needed employees from one another. That would keep pay gains climbing swiftly. If it is cooling toward a more normal level of tightness, economists would expect wage gains to pull back.

So far, policymakers have been interpreting labor market data to mean that balance is in fact returning. That’s partly because another closely watched measure of wage growth, the average hourly earnings index, has been showing steady moderation.

That gauge is useful because it comes out every month, but it is also susceptible to data quirks. It tends to move around as the composition of the work force shifts. If a lot of low-wage workers gain jobs, for instance, the hourly earnings measure can drift lower.

Given that, Fed officials closely monitor the Employment Cost Index, which avoids some of the data pitfalls that afflict other wage measures.

“Wage growth is slowing down, but not as much as other data sources have suggested,” Cory Stahle, economist at Indeed Hiring Lab, wrote in an analysis after the report. He added that “pay growth will likely keep slowing going forward, but the labor market continues to display notable resilience.”