Questions About The Accuracy of Q4 ECI Data
The widely followed employment cost index (ECI) showed a marked slowdown in labor costs in the fourth quarter, creating the impression that cost pressures from the tight labor markets may have peaked. Yet, two questions arise about the accuracy of the Q4 ECI data.
First, the finance industry was responsible for the slowdown in labor costs in Q4. According to the Bureau of Labor Statistics (BLS), employment costs in the finance and insurance industry dropped 1.1% from the prior quarter. That drop in labor costs is at odds with Q4 results from major financial firms.
JP Morgan and Goldman Sachs reported higher than expected expenses in Q4, fueled by soaring employee compensation and benefits costs. Other financial institutions (e.g., Wells Fargo) saw above-average wage inflation.
Several years ago, a former BLS commissioner told me that financial institutions do not regularly provide employee compensation data. It's unclear whether financial firms have increased their response rate, but the Q4 ECI data is at odds with what firms publicly say during earnings calls.
Second, the ECI data measures "the change in the cost of labor, free from the influence of employment shifts among occupations and industries." According to BLS, the number of total separations, voluntarily and non-voluntarily, reached a record of 3% (6.3 million) in Q4. Quits, or voluntary separations initiated by the worker, hit a series high of 4.5 million.
That scale of worker mobility raises questions over the accuracy of ECI since it blocks the effect of people moving from one occupation and industry to another.
A more accurate measure of employee costs comes from the County Employment and Wage data (QCEW) reported quarterly by BLS. BLS estimates the QCEW from state tax records and is the primary GDP wage and salary income data source. Unfortunately, this data comes out with a long lag (Q3 2021 data released on February 23, 2022.)
In the meantime, it's essential to follow what companies are saying and doing concerning labor. Amazon, Costco, Starbucks, and many other firms, have scheduled pay increases and benefit increases for 2022 to maintain existing workers and attract new ones.
In my view, the pressure from rising labor costs will be a recurring issue for 2022 and beyond.