Employment Cost Index Gives Phillips Curve backers a lift
Of the three government indicators Thursday — personal income/spending, jobless claims and employment cost index — the ECI was probably the least relevant to markets since it didn’t provide a lot of new information about the state of the economy.
But it does appear to have solved a mystery from recent monthly employment data: why the miserable jobs market hasn’t been reflected in wages and salaries. Until now.
And it suggests deflation may be more of a risk than other wage data have indicated.
The ECI expanded a record low 0.3% in the first quarter from the fourth quarter of last year. For the private sector it was just 0.2% and many of the hardest-hit industries experienced outright wage and benefit deflation including finance, construction and professional services.
For the year, wages and salaries were up just 2.2%.
In contrast, average hourly earnings are running at a sturdier 3.4% annual clip. As Zach Pandl of Nomura explained, average hourly earnings are affected by compositional shifts within the employment market. In other words, if job losses are concentrated in lower-earning sectors, then average hourly earnings would look artificially higher. ECI is a “cleaner” measure, he said.
And the ECI lends support to Phillips Curve adherents that see a relationship between labor markets and inflation. When slack builds, then wage demands diminish. And since labor makes up the bulk of consumer prices, inflation comes down as a result. If enough slack builds, then the economy could even fall into deflation.
In contrast, the average hourly earnings data have backed the “sticky price” argument that many costs and prices (especially wages and services) stay pretty anchored even in the face of rising and falling economic slack. That school of thought suggests low inflation, but not deflation."