The Most Comprehensive Measure Of Worker Compensation Confirms Wages Are Rising

Unit labour costs (ULC) climbed by 0.6% in Q2. This is according to newly released data from the Bureau of Labour Statistics.

This was below the 1.0% rate expected by economists.

However, revisions to past data suggests wages are trending up at a much faster pace than previously though. Here’s Barclays’ Dean Maki:

…there were substantial revisions to data for previous quarters due to the incorporation of the recent annual revisions of the National Income and Product Accounts, and the revised data show slower recent growth in productivity and faster growth in unit labour costs. For example, the y/y growth rate of productivity in Q1 2014 was revised to 0.7% from 1.0%, while unit labour cost growth was revised to 2.6% from 1.2%. In Q2 2014, productivity increased 1.2% y/y, while unit labour costs rose 1.9%. This release also includes the broadest measure of compensation per hour growth, and this increased 3.1% y/y in Q2 2014. This suggests that compensation is growing faster than narrower measures such as average hourly earnings or the Employment Cost Index suggest. Overall, we view the rise in compensation and unit labour costs revealed in this report as a modestly positive influence on core inflation in coming months.

Last week, traders blamed a 317-point plunge in the Dow on the Employment Cost Index rising faster than expected.

This is a big deal, because it’s both a sign of inflation and labour-market tightness, two forces that put pressure on the Federal Reserve to tighten monetary policy sooner than later. The prospect that the Fed could tighten monetary policy sooner than expected is frequently blamed for causing market volatility. The idea is that if the Fed tightens, then it pulls liquidity out of the credit markets, which indirectly would pull liquidity out of the stock markets.

“While average hourly earnings and the ECI are more timely measures, the ULC report not only accounts for productivity but also uses the most comprehensive range of compensation, including wages, benefits and other forms (such as stock options),” noted Bloomberg economist Josh Wright. “If average hourly earnings continue to diverge from ULC and ECI, look for the Fed (which showed last week that it still wants to lean dovish) to begin parsing the relationship between inflation and wage versus non-wage compensation.”

Pantheon Macroeconomics’ Ian Sheperdson is a bit more sanguine than today’s inflation worrywarts. But he nevertheless acknowledges that inflation risks are present.

“Unit labour costs are up 1.9% y/y, which seems unthreatening, but inflation can still rise if, as surveys suggest, firms seek to pre-empt higher wage costs by raising prices now,” said Shepherdson.

Here’s the chart via Shepherdson.

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