Compensation Cost Growth Slows in Second Quarter

After an unexpected surge in pay and benefits in the first quarter, labor costs have slowed down in the second quarter but still remains robust.

The Employment Cost Index (ECI) increased 0.9% in the second quarter of the year, new data finds, after rising 1.2% last quarter, according to Bureau of Labor Statistics data released July 31. Wages and salaries increased 0.9% and benefit costs increased 1% from March 2024. Many economists forecasted that the ECI would rise 1%.

Year over year, compensation costs in the U.S. for civilian workers—including pay and benefits—rose 4.1%, down slightly from the 4.2% year-over-year rise in the first quarter of 2024. Meanwhile, compensation for state and local government workers is up 4.9%.

Wages and salaries grew 4.2% for the 12-month period ending in June 2024 and rose 4.6% for the 12-month period ending in June 2023, according to the BLS. Benefit costs grew 3.8% over the year and rose 4.2% for the 12-month period ending in June 2023.

The ECI report comes as other recent data has found that employers are slowing salary hikes. Roughly half (47%) of U.S. organizations report that their salary budgets for the 2024 cycle are lower than the previous year, according to a new report from consulting firm WTW, which surveyed roughly 31,000 organizations. The overall median pay raise for 2024 fell to 4.1%, compared with 4.5% in 2023. Employers—at least so far—are pegging overall salary budget increases even lower, WTW found, with organizations predicting a 3.9% jump in 2025.

Although wage growth appears to be slowing, it’s still robust, said Sydney Ross, junior economic researcher at SHRM.

“As shown in the recent JOLTS report, employers are still dealing with a tight labor market and persistent talent shortages across key industries,” she said. “This means there will be more competition between employers for skilled talent, especially for those in specialized industries.”

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.

Ross said that if the Federal Reserve finds there is enough evidence to start gradually lowering interest rates, it “would be a welcome relief to employers that are facing high employment costs.”

“Lower interest rates will allow organizations to start investing in creative recruitment and retention strategies, particularly ones that keep skilled workers engaged and offer career pathways that allow them to move up within an organization, and invest in developing more creative recruitment and retention strategies,” she said.