Total wage bills for civilian workers fell 3.7% in the trailing 12 months to March after adjusting for inflation, according to the Employment Costs Index released on Friday.
It’s the largest drop since the Bureau of Labor Statistics began keeping records adjusted for inflation in 2001. Additionally, it comes at a time when labor costs – which include employers’ wages and health, pension and other benefits – are rising rapidly, before accounting for inflation, as employers seek to fill vacancies and reduce their workforce keep.
The data, which tracks changes in employers’ labor costs, quantifies the pain people feel as prices rise faster than they have in the last 40 years. Soaring food, gas and housing costs eat up workers’ paychecks.
Inflation-adjusted wages and salaries fell 3.6%, while benefits fell 4.2%, both the largest declines since the series began 21 years ago.
“It’s bad news for workers,” said Jason Furman, an economics professor at Harvard University and former chair of the Council of Economic Advisers in the Obama administration, of the inflation-adjusted data. “Wages have fallen very quickly in the last year and are well below the level of two years ago.”
Costs are increasing rapidly before inflation is factored in
At the same time, the extremely tight labor market is forcing employers to raise wages and benefits to attract and retain workers. This increases concerns about the duration and magnitude of inflation. Federal Reserve Chair Jerome Powell has pointed to the Labor Cost Index data as a factor in the central bank’s data Decision to raise interest rates last month for the first time since 2018.
Compensation costs for civilian workers rose by a faster-than-expected 1.4% before inflation adjustment, according to the index in the first quarter of 2022. The cost of wages and salaries increased by 1.2% compared to December and the cost of benefits by 1.8%.
Looking at the year ended March, unadjusted compensation expense increased 4.5%, compared to 4.0% for the 12-month period ended December.
The cost of wages and salaries increased by 4.7% compared to 4.5% for the year ended December and the cost of benefits increased by 4.1% compared to 2.8%.
The latest remuneration report is likely to keep the Fed in a fairly hawkish mood, said Kathy Bostjancic, chief US economist at Oxford Economics. She expects the central bank to hike rates by another 50 basis points at its May and June meetings.
“What worries them is that this higher inflation has been going on for so long that once it starts to seep into consumer business expectations, it will be harder to squeeze inflation out of the system than simply wait for supply chains to correct ‘ she called.