US pay and benefits rose at steady pace last year, though gains remain modest

WASHINGTON – Wages and benefits rose at slightly healthier rate last year, a sign strong job gains could be forcing companies to pay a bit more for workers.

The Labor Department said Friday that the employment cost index, which measures pay and benefits, rose 2.2 per cent in 2014, up from 2 per cent the previous year. It’s also ahead of inflation, which rose 1.3 per cent.

Yet the increase is still sluggish by historical standards. In a healthy economy, the index usually rises at about a 3.5 per cent pace.

“While still quite tame, wages have picked up a little,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “We expect more acceleration, especially if the unemployment rate falls some more, as seems highly likely.”

The employment cost index began to creep up last spring, increasing 0.7 per cent in the second and third quarters. Wages and benefits rose 0.6 per cent in the fourth quarter. The final three quarters of 2014 saw the strongest gains since the recession.

The Federal Reserve is closing watching wages as it considers when to raise the short-term interest rate it controls. Fed Chair Janet Yellen considers rising wages a key sign that the job market is nearing full health. Higher pay can also push up inflation, which typically prompts the Fed to raise interest rates.

Employers added nearly 3 million jobs in 2014, the best year for hiring in 15 years. That helped drive the unemployment rate down to 5.6 per cent, the lowest in six years, from 6.7 per cent a year earlier. Such trends usually push up paychecks, as companies are forced to offer higher salaries to attract a dwindling number of unemployed workers.

Other measures of wages don’t show any pickup. Average hourly pay, a gauge included in the monthly jobs report, rose just 1.7 per cent in 2014, below the previous year’s pace.

Yet most economists think the employment cost index is a better measure of wages. It focuses on how pay levels change within occupations and industries. The average hourly wage figure is influenced by changes in which industries are hiring. As a result, big job gains in lower-paying sectors, such as restaurants and retail, can drag down average hourly pay.

Higher wages can be a precursor for higher inflation. As Americans earn more at their jobs, they spend more, enabling stores and other businesses to raise prices.

Consumers may not like higher prices, but the Fed would love to see them. Fed policymakers prefer inflation to be at about 2 per cent a year. That provides them a cushion against deflation, a destabilizing fall in wages and prices.

Yet prices rose just 1.3 per cent last year, according to the Fed’s preferred measure. They have been below the Fed’s target for three years. The Fed’s policymaking committee attributed much of the weakness to lower gas prices in a statement Wednesday. It also said it expects inflation will rise gradually to 2 per cent in the “medium term” as the impact of the gas prices fades.