WASHINGTON—U.S. labor costs rose at the slowest pace in at least
three decades in the spring, a sign of persistently sluggish wage
growth that could weigh on the Federal Reserve's decision to raise
short-term interest rates.
The employment-cost index, a broad measure of workers' wages and
benefits, climbed a seasonally adjusted 0.2% in the second quarter
from the first quarter, the Labor Department said Friday. That
marked the smallest quarterly gain since record keeping began in
1982.
Economists surveyed by The Wall Street Journal expected a 0.6%
increase.
Civilian worker wages and salaries, reflecting more than
two-thirds of employee costs, grew 0.2% in April through June, also
the smallest gain on record. Benefits climbed 0.1%.
The latest compensation gains were due entirely to higher
employment costs for government workers. Compensation for private
sector workers was flat in the spring, the first time on record
that that category failed to rise.
Compensation costs can ebb and flow from quarter to quarter.
Over a broader period, wages and benefits are growing modestly.
Total compensation grew 2.0% in the second quarter compared to a
year earlier. That was a slower pace than the 2.6% year over year
growth in the winter.
The Federal Reserve is monitoring wage figures as it moves
closer to raising interest rates from near zero, their level since
late 2008. An acceleration in wages would signal the labor market
is finally close to healthy, six years after the recession, and
could nudge the Fed to act sooner rather than later to avoid an
overheating economy.
But the latest slowdown suggests slack remains in the jobs
market and could bolster the case for officials to wait longer to
raise rates.
Economists have long anticipated a pickup in wages as the labor
market tightens, but previous jumps have been short-lived. Another
measure of wages, gleaned from the Labor Department's monthly jobs
report, has disappointed recently. The average hourly earnings of
private-sector workers-which exclude benefits--rose a modest 2% in
the year through June.
The labor market otherwise appears to be progressing as hiring
remains steady. The unemployment rate fell to 5.3% in June - down
from a peak of 10% in October 2010 and within spitting distance of
the 5% to 5.2% range the Fed considers the economy's long-run
average.
But the persistent lack of momentum in wage growth suggests
slack remains, likely due to the millions of Americans who are
jobless or aren't even looking for work even though they are of
prime working age. A broader measure of unemployment-which takes
into account those Americans as well as part-time employees who
would prefer full-time work-stood at 10.5% in June. Just before the
recession, that figure stood at 8.4%.
On Wednesday, Federal Reserve officials released a statement
after their latest policy meeting suggesting they see continued
progress in the labor market, and suggested the central bank could
move as early as September to start raising short-term interest
rates.
"The Committee anticipates that it will be appropriate to raise
the target range for the federal funds rate when it has seen some
further improvement in the labor market and is reasonably confident
that inflation will move back to its 2 percent objective over the
medium term," the central bank said in a policy statement.
The economy overall regained steam in the second quarter but
continued to underperform. Gross domestic product grew at a 2.3%
annual pace in the spring, up from the first quarter's 0.6% pace,
the Commerce Department said Thursday.
Friday's report showed private-sector compensation costs were
flat in the second quarter after rising 0.7% in the first quarter.
Compensation costs for state and local governments rose 0.6% in the
second after climbing 0.5% in the first.
Write to Josh Mitchell at joshua.mitchell@wsj.com
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