Compensation Cost Growth Higher Than Expected in Second Quarter

Compensation growth accelerated to a higher level than anticipated in the second quarter of the year, new government data finds, with wages and salaries growing at a faster clip than benefits costs.

The Employment Cost Index (ECI) increased 0.9% in the second quarter of 2025, according to U.S. Bureau of Labor Statistics (BLS) data released July 31. That’s the same percentage growth as in the first quarter, and it is higher than the 0.8% growth that economists predicted. Wages and salaries increased 1% from March, up from a 0.8% rise in the first quarter, and benefits costs increased 0.7%, down from a 1.2% rise in the first quarter.

Year over year, compensation costs in the U.S. for private-industry workers rose 3.5%. Wages and salaries increased 3.5% for the 12-month period ending in June, while the cost of benefits increased 3.4% for that period.

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

Although the data shows higher than anticipated growth, the figure still largely suggests that wage growth has moderated in 2025, said Andrea Medici, labor economist at SHRM, adding that the growth rate in year-over-year average hourly earnings has declined during the first six months of 2025.

“These dynamics are likely to exert downward pressure on overall compensation costs, providing employers with some relief compared to the accelerated wage growth seen in prior years,” Medici said.

The ECI found that wages and salaries rose at a higher rate, suggesting that employers still need to budget for annual salary increases to remain competitive. However, other recent data has suggested that employers are pumping the brakes on overly competitive pay raises as more organizations say they are less concerned with retaining and attracting employees and more concerned with addressing economic volatility.

A March 2025 Mercer survey found that employers are issuing lower-than-anticipated annual pay increases. So far in 2025, employers delivered an average merit increase — the percentage of payroll given to employees as a base salary increase for merit — of 3.2%, below the 3.3% they projected that they would give last November. The average total increase that employers gave in 2025 was 3.5%, which accounts for all salary increases, including merit, promotional, cost-of-living, and other adjustments. That’s also lower than employers’ fall projections, when they said they expected to deliver an average 3.6% pay bump.

Meanwhile, a recent survey of 1,569 U.S. organizations from consulting firm WTW found that a majority of employers are planning to stay flat with salaries — or decrease them — in the next year. About 3 out of 5 organizations saw their salary budgets change in the last pay cycle, according to WTW: Of those, 53% reported no change between their anticipated and actual pay budgets in 2025, 31% said they are projecting lower salary increase budgets than last year, and 15% plan to boost salary increases in the next year.

Overall, Medici said, “uncertainty around future trends in employer costs remains high, particularly as they relate to rising health care costs.”

Employers’ health care costs grew 4.5% in 2024, and they are expected to increase by an average of 5.8% this year, according to Mercer.

Employers would be well served to closely monitor trends in wage growth and health care costs “to balance competitive compensation packages with long-term cost sustainability,” Medici said.