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Wage and Salary Growth Outpaces Predictions

Closeup of a man holding cash in his hands

Compensation growth kicked up more than expected in the first quarter of the year in another sign of persistent inflation.

Workers were paid 1.2 percent more in the first three months of 2024 than in the fourth quarter of 2023, according to the Employment Cost Index (ECI), released April 30 by the U.S. Bureau of Labor Statistics (BLS). That’s up from the 0.9 percent climb in the fourth quarter of 2023. Wages and salaries increased 1.1 percent, as did benefits costs, from December 2023. Many economists forecasted that the ECI would rise 1 percent.

Year over year, compensation costs—including pay and benefits— in the U.S. for civilian workers rose 4.2 percent, an uptick from the 4.1 percent year-over-year rise in the final quarter of 2023. Meanwhile, compensation for state and local government workers is up 4.8 percent.

Wages and salaries grew 4.4 percent for the 12-month period ending in March 2024 and rose 5 percent for the 12-month period ending in March 2023, according to the BLS. Benefits costs grew 3.7 percent over the year and rose 4.5 percent for the 12-month period ending in March 2023.

The uptick is a sign that persistent inflation is still affecting labor costs and is a reversal from months of slowing growth. According to the BLS, private industry’s total compensation cost growth soared from late 2020 through the middle of 2022 but has declined steadily since then.

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 cuts. The growth of wages in the first quarter likely means the Fed will not cut rates at its next meeting.

The ECI is also an important indicator for employers.

One major reason for employers to care about the ECI is that it provides a sense of how total worker compensation is changing over time, said Justin Ladner, senior labor economist at SHRM.

“Knowing this helps employers make decisions about pay adjustments and related compensation decisions in order to stay competitive in the labor market,” he said.

The breakdown of total compensation costs into components also allows firms to understand what is driving change in compensation costs, which helps them plan accordingly, he said. “For example, a firm’s response to a rising ECI might be very different depending on the main driver of the rise,” such as health care or wages, he explained.

Indeed, red-hot inflation and the tight labor market has caused employers to turn to competitive pay raises over the past couple of years. But in recent months, pay has slowed as inflation has stabilized. Mercer just found that U.S. employers reported that 2024 annual merit increase budgets rose by 3.3 percent on average, while total salary increase budgets jumped by 3.6 percent—down from the November 2023 projections of 3.5 percent and 3.8 percent, respectively.


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