January 28, 1998 in Nation/World

Wage, Benefit Gains Accelerate American Workers Pocket Higher Pay, But Increase May Boost Inflation Rate

Martin Crutsinger Associated Press
 

Americans’ wages and benefits rose in 1997 at the fastest clip in four years, good news for workers but a troubling sign of inflationary pressures down the road.

The Labor Department reported that its Employment Cost Index, considered the best measure of changes in wages and benefit costs, rose 3.3 percent last year, a significant acceleration from gains of 2.9 percent in 1996 and 2.7 percent in 1995.

Wage and benefit pressures were increasing as the year ended with a 1 percent jump in compensation costs in the final three months of 1997, the sharpest quarterly advance in five years.

“Wage compensation is definitely accelerating in tight labor markets all around the country,” said Allen Sinai, chief economist at Primark Decision Economics in New York. “This will present a challenge for companies to find ways to offset the increasing costs.”

The inflation-sensitive bond market reacted negatively to the jump in wages and fringe benefits, with falling demand pushing the yield on Treasury’s benchmark 30-year bond up to 5.95 percent.

Stock prices, however, ignored the labor price report, preferring to focus on better-than-expected earnings for several blue-chip companies. The Dow Jones industrial average gained more than 102 points in trading Tuesday.

Through most of the current seven-year economic expansion, wage pressures have been remarkably well-behaved even as unemployment rates have fallen to levels not seen in 25 years. The unemployment rate in December was 4.7 percent.

Last fall, Federal Reserve Chairman Alan Greenspan warned that it “strains credibility” to expect the benign combination of low unemployment rates and low wage pressures to last forever. He called inflation coming from tight labor markets one of the biggest threats to continued economic growth and left no doubt the Fed would quickly move to raise interest rates at the first sign of trouble.

However, economists said Tuesday they did not expect the latest employment report to trigger any Fed rate increases, given the financial crisis in Asia, which is expected to slow U.S. growth by as much as one percentage point.

“Unless there is a significant jump in consumer prices stemming from the higher wage pressures, the Fed is not going to step in and raise interest rates because of what is happening in Asia,” said Cynthia Latta, senior economist at DRI-McGraw Hill Inc.

Inflation as measured by consumer prices rose just 1.7 percent last year, the best showing in 11 years.

The 1 percent quarterly increase in compensation costs was slightly higher than had been expected and the 3.3 percent year-over-year increase was the biggest since 3.5 percent in 1993.

Wages and salaries, the biggest component of compensation, were up 3.8 percent last year, compared with a gain of 3.3 percent in 1996. Fringe benefits, primarily health insurance and pensions, rose 2.1 percent for the year, up slightly from a 2 percent increase in 1996.

However, for the fourth quarter, fringe benefit costs were up 0.9 percent, far ahead of the 0.4 percent increase in the third quarter.

One of the main factors holding down wage pressures in this recovery has been savings in health care costs, achieved primarily by moving workers to managed care programs. But there have been a number of indications that health care costs are starting to accelerate.

Jared Bernstein, an economist at the labor-backed Economic Policy Institute, said the 3.3 percent rise in wages and fringe benefits was a welcome sign finally that average workers were starting to benefit from the economic expansion.

“Thanks to a tightening of the labor market and the increase in the minimum wage, we are finally seeing some real wage gains,” he said.

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Washington, Idaho lead way

Three states in the West led the nation in personal income growth during the July-September quarter.

Incomes grew 1.8 percent in Utah and 1.7 percent in Washington and Idaho, compared with the national average of 1.1 percent, the Commerce Department said Tuesday. All three states had rapid increases in manufacturing income.

Utah’s growth was helped by statewide road reconstruction. In Washington, home of Boeing Corp., the strength reflected robust aircraft manufacturing and in Idaho, gains in the electronic equipment industry.

-Associated Press


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