Like everyone else, the media have been confused on this basic question, with the main data sources providing very different answers. Last Friday, the Bureau of Labor Statistics (BLS) released the employment cost index (ECI) which showed a sharp slowing in the rate of nominal hourly compensation growth in the first quarter to an annual rate of just 2.4 percent. This is well below the rate of inflation, which, depending on the course of gas prices, will be in the range of 3.0-4.0 percent for this year.
On Thursday, BLS released productivity data, which showed that hourly compensation was rising at an annual rate of 5.7 percent for the same quarter. Further complicating the picture is the employment report that BLS released this morning showing wages rising at a 4.7 percent annual rate over the most recent three months (compared to the prior 3-month average).
The picture is not quite as confusing as this may appear. First, the quarterly compensation data from the productivity report should be ignored. There are enough random factors on both the compensation side and the hours side that this number is essentially worthless. For example, this data shows hourly compensation rising at a 10.0 percent annual rate in the 4th of 2004 and at just a 1.3 percent annual rate in the 2nd quarter of 2005. Compensation growth in the world is not so erratic.
It is worth taking the annual data that shows hourly compensation increasing by 3.8 percent over the last year. This is probably a good start.
The slowing of compensation growth in the ECI turns out to be entirely attributable to a sharp slowing in benefits growth. The pattern of benefit growth in the ECI is also extremely erratic. This is due to the timing of firm's payments to pension funds and insurers, it has little to do with the benefits actually received by workers. If we just look at the wage component of the ECI, we find a modest uptick in wage growth to a 2.8 percent annual rate in the first quarter, although the pace of wage growth over the last year at 2.4 percent is down from the 2.7 percent rate in the year to March 2005.
Finally, the average hourly wage series in the employment report is now showing an extraordinary acceleration in wage growth. Much of this is driven by a 0.5 percent increase reported for April. The monthly wage data is erratic and the April jump will likely be partially reversed by slower than trend wage growth in coming months, but it is hard to avoid the conclusion that there has been an acceleration of wage growth in this series. At the beginning of 2005, the average hourly wage was rising at close to a 2.5 percent annual rate. It is probably rising at rate between 3.5-4.0 percent now. Such a figure would be consistent with the compensation data in the productivity report.
The are some technical differences in the way that the ECI is constructed that could explain its divergence with the hourly wage series (the wage data usually track closely). But, I would bet on the average hourly wage series at this point, the gradual acceleration (partially dismissing the April number) is consistent with a picture of a tightening labor market that is finally allowing workers to share in some of the productivity gains of the last five years.