The latest numbers show pay and benefit increases running at a consistent pace in the second quarter, a signal that the job market isn't adding fuel to price pressures.
The gauge rose 0.9% from the first quarter to the second. Civilian workers' pay increased 0.9% in the April-to-June period and 3.2% on a yearly basis; after stripping out inflation, that yearly gain disappeared.
The data overall point to a roughly stable match between available workers and employer demand. The quarter began with solid hiring, but that momentum cooled, and the ECI's second-quarter reading shows the earlier burst didn't create a meaningful acceleration in pay.
Because the ECI covers benefits as well as cash wages, it gives a fuller view of employers' labor costs than a simple pay measure. That broader view matters when benefit expenses are climbing faster than base pay. This means a worker's take-home raise may look smaller than the actual growth in what their employer spends on them.
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The report boils down to a basic conflict: businesses are paying more for each employee, but the purchasing power of workers' pay is shrinking once prices are factored in. That gap is a key reason the ECI remains one of the Fed's most closely watched labor-market gauges.
Benefits are a large and growing piece of total compensation. The ECI's benefit category includes paid leave, retirement contributions and health insurance. When benefit expenses accelerate, employers' overall labor costs climb even if base pay is steady. Because the index weights both pay and benefits, faster benefit growth can carry the overall ECI even when wage gains look modest.
The ECI is one of the broadest measures of labor costs because it tracks both cash wages and the full range of benefits that employers provide. It is designed to show changes in the total cost of employing someone, not just the amount that appears on a paycheck. That broad coverage is why the ECI can post a solid gain even when base wages are relatively flat.
Federal Reserve policymakers have been watching the jobs market closely. After deciding on Wednesday to leave the central bank's benchmark interest rate unchanged, Fed Chairman Kevin Warsh said, "Job gains have kept pace with the workforce and the unemployment rate has changed little."
A separate report released Thursday showed inflation slowing in June, though it continues to exceed the Fed's 2% target.
Friday's compensation reading is the middle piece of a dense run of labor-market data: Thursday's inflation report documented slower price growth, and next week's jobs report will update hiring and unemployment. Taken together, these reports help clarify how pay growth, benefit costs and inflation are moving relative to one another.
July's jobs report is due from the BLS next week, and it will provide an updated look at hiring and pay across the country. Economists forecast that payrolls increased by close to 90,000 in July, a step up from June's gain, while the unemployment rate held steady.
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