The tight labor market sent worker compensation growth in the third quarter to its highest level in 20 years, posting a 1.3% gain, according to Employment Cost Index data released by the Bureau of Labor Statistics on Friday.
The Employment Cost Index is the Federal Reserve’s top wage gauge, and is often less volatile than other wage measures.
Within the overall compensation index, wage and salary growth had a faster increase at 1.5% compared to 0.9% in the previous quarter, while benefits grew by 0.9% on the month.
As demand for labor remained strong and quit rates reached a record high in recent months, companies have been competing fiercely for workers, resulting in a significant increase in compensation.
Compensation grew faster than the prior quarter for higher-paying jobs in sectors like financial, and professional and business services, while lower-paying jobs in sectors like leisure and hospitality had a similar growth rate.
For private industry workers, financial services had a sharp increase of 2.0% in the third quarter, after a 1.7% decline in the prior quarter. Professional and business services also reported a significant rise of 1.5% compared to 0.8% previously, while leisure and hospitality recorded a similar growth rate of 2.5% in the third quarter.
The takeaway
The surge in worker costs in the third quarter was driven by strong labor demand and shortages of labor supply. With elevated inflation in the third quarter, the change in real wage growth should be less significant than what the headline figure suggests.
Still, as the labor market continues to be tight in the coming months, we should expect wage and benefit growth to stay above the pre-pandemic level.
