Wage Inflation Moderate

The employment cost index shows wage inflation NOT accelerating, though benefits costs rose.  The press reports two different measures of wage inflation: the employment cost index, and average hourly earnings.  Here’s the quarter-to-quarter changes, at annual rates, for the two measures:

There are two important differences.  First, the ECI adjusts for the mix of jobs, so that if more high-wage workers are hired, that does not affect the ECI.  In essence, the ECI is the average wage increase of those who had the same job from one year to the next.  In contrast, the AHE is the change in the average wage, and the average changes with the mix of employees.  The second difference is that AHE includes stock options, which are not in the ECI.  (There are other differences as well.)

So what do these charts tell us?  One possible explanation is that the improvement in the stock market in the last year has triggered stock option gains.  I find this unconvincing.  Look at the stock market:

I don’t see the stock market rising at the right time to explain the gap between AHE and ECI that developed in the spring of 2005.  Options should have been looking good in 2004, as the market recovered from the recessionary lows.

The other explanation is that the mix of jobs has changed, with companies hiring people into more skilled positions.  Some companies may be promoting people into a higher ranked position, but still having them do essentially their old job.  That avoids an across-the-board pay raise, but  provides  the wage boost that some critical employees require.  In all, I think it’s a sign of a tight labor market.