Salary, Benefit Growth Slowed Again in Third Quarter

Compensation growth slowed slightly in the third quarter of the year, signaling that the labor market is cooling.

The Employment Cost Index (ECI) increased 0.8% in the third quarter of the year, new data finds, after rising 0.9% last quarter, according to Bureau of Labor Statistics data released Oct. 31. Wages and salaries increased 0.8% and benefit costs increased 0.8% from June 2024. That’s a notch below forecasts, as many economists estimated that the ECI would stay consistent with the second quarter and rise 0.9%.

Year over year, compensation costs in the U.S. for private industry workers—including pay and benefits—rose 3.6%, down slightly from the 3.9% year-over-year rise in the second quarter of 2024 and down from the 4.3% in September 2023. The cost of benefits increased 3.3% for the 12-month period ending in September 2024, less than the 3.9% increase for the 12 months ending in September 2023.

Meanwhile, compensation for state and local government workers is up 4.7%, just below the 4.9% reported in July.

The ECI measures changes in the cost of employees' wages and benefits to employers over time. The Federal Reserve closely watches the ECI and the trajectory of wage growth as it considers interest rate changes.

The fact that the ECI trended downward makes sense given inflation’s similar pattern, said Sydney Ross, junior economic researcher at SHRM.

“The Q3 ECI report reinforces other data we have seen showing there is a gradual cooling of the U.S. labor market, as there has been a mild decline in compensation growth over the 3- and 12-month periods,” she said. “Salary growth rates have continued to moderate over the last year for all civilian workers, and among private industry employers, the cost of health benefits has started to moderate during the 3-month period ending in September 2024.”

The ECI report comes as employers are planning their salary strategies for next year, as well as looking at their health benefits costs.  U.S. employers are budgeting for an average of 3.3% merit increases and 3.6% increases for their total salary budgets for nonunionized employees—the same as the actual pay increases that employers delivered in 2024, recent data from Mercer showed. Other industry surveys have found that employers will hand out lower pay raises next year.

Overall, the slow cooling of the labor market is causing most employers to pump the brakes on the aggressive pay bumps many employees have experienced over the past several years.

“Historical trends suggest a decline is likely in the months ahead, signaling a potential end of the elevated budgets we’ve seen over the past three years,” said Lauren Mason, Mercer’s U.S. workforce solutions leader.