The Employment Cost Index (ECI) is a key component of the National Compensation Survey (NCS), a nationally representative survey providing data on pay and employee benefits. As a Principal Federal Economic Indicator (PFEI), the ECI tracks the changes in labor costs to employers, independent of employment shifts among different occupations and industry categories. It serves as a valuable tool for measuring and analyzing Arizona labor market trends and trends in labor costs over time.

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Alongside other outputs of the NCS such as the Employer Costs for Employee Compensation (ECEC), Employee Benefits in the United States, and Health and Retirement Plan Provisions publications, the ECI plays a crucial role in understanding and monitoring the dynamics of employee compensation and benefits in the United States.

Latest Trends

Exhibit 1 illustrates the over-the-year percent change in the Employment Cost Index for Total Compensation for Private Industry Workers in the United States, including various metropolitan areas. In the United States, the ECI for total compensation for the second quarter of 2023 was up 4.5%, which was slower than the 5.5% rate in the comparable period in 2022. Further, when we focus on the Phoenix-Mesa-Scottsdale MSA, we observe a similar trend: in the second quarter of 2022, the ECI total compensation for the MSA was up 5.5%, in-line with the national average. However, in the second quarter of 2023, the ECI for total compensation for the MSA decelerated to 3.9%, placing it below the national average.

Exhibit 1: Employment Cost Index Total Compensation for Private Industry Workers

Exhibit 2 presents a comparative visualization between the United States as a whole and specific metropolitan areas, showcasing the changes in ECI for total compensation over a 12-month period. This exhibit directly compares how total compensation has evolved over time across the U.S. and Arizona’s peer metros. Use your cursor to switch between the different values to compare changes in total compensation between the national data and the different metropolitan areas.

Exhibit 2: Phoenix and U.S. Employment Costs Have Begun To Decelerate

Data Breakdown

The ECI offers insights into ownership categories, including civilian, private industry, and state/local government workers. It also breaks down compensation components, such as total compensation, wages/salaries, and total benefits.

Furthermore, the ECI provides occupation and industry breakdowns for private industry workers, allowing for a detailed examination of compensation variations within these sectors. The ECI considers different regions, including the Northeast, South, Midwest, and West census regions, as well as metropolitan and non-metropolitan areas. Additionally, it offers periodicity options, such as 12-month and 3-month percentage changes, as well as index numbers both adjusted and non-adjusted for inflation.

It’s important to note that some data limitations exist within the ECI. While regional data breakdown is available for private industry workers, total benefits breakdown by occupation and industry is only provided for private industry workers at the national level. Additionally, the data can only be broken down by occupation or industry separately, not both simultaneously.

Composition Components of ECI

The ECI allows users to break down the data by compensation components of total compensation, wages and salaries, and total benefits. Total compensation encompasses both wages and salaries and the value of employee benefits provided by the employer. Wages and salaries refer to all forms of monetary payments made to employees for their work, including hourly wages, salaries, bonuses, commissions, and overtime pay. These components capture the direct financial compensation received by employees.

On the other hand, total benefits represent non-wage forms of compensation provided by the employer. This includes employer-paid insurance premiums, retirement contributions, and other benefits that contribute to overall well-being and security. Employee benefits encompass a wide range of offerings, such as healthcare coverage, retirement plans, paid leave, and various supplemental benefits.

It is important to note that certain elements, such as tips, uniform and tool allowances, free or subsidized room and board, and on-call pay, are excluded from the NCS data.

Classification of Workers

The classification of workers in the Employment Cost Index includes various categories to distinguish different types of employment. The primary category is civilian workers, who encompass individuals employed in private industry and state and local government. However, there are certain exclusions within the civilian economy. Workers employed in federal government and quasi-federal agencies, such as military personnel, are not considered part of the civilian workforce that is represented in the Employment Cost Index data. Additionally, agricultural workers, volunteers, unpaid workers, individuals receiving long-term disability compensation, and those working overseas are also excluded from the civilian economy classification.

Private industry workers, a subset of civilian workers, are employed by private companies and organizations. However, certain groups are excluded from the private industry classification as well. This includes workers in private households, such as domestic helpers or live-in caretakers, who have distinct employment arrangements. Additionally, self-employed individuals who operate their own businesses and have the authority to set their own pay, such as proprietors, owners, major stockholders, and partners in unincorporated firms, are not considered private industry workers. Lastly, family members who receive token wages, typically symbolic payments rather than market-based salaries, are also excluded from this category.

Inflation-adjusted estimates

The ECI offers percentage changes in the form of current and constant dollar estimates. Constant dollar percentage changes show the change in percentage of the index after removing the impact of changes in consumer prices, allowing for comparisons on a same dollar basis. Constant dollar estimates are particularly useful as they provide insights into the real change in compensation costs over time. In contrast, current dollar estimates are not adjusted for inflation.

Collection Methods and Sample Frame

As mentioned earlier, the Employment Cost Index relies on the NCS for data collection. The Bureau of Labor Statistics (BLS) employs field economists who are trained extensively to collect compensation data from survey respondents. These field economists use various methods to collect data, including personal visits, mail, telephone, and email. Unlike traditional questionnaires, they rely on conversational interviews and descriptive documents like task lists to gather information on cost, coverage, and provision data from respondents.

The NCS is a voluntary establishment-based survey, meaning that it focuses on collecting data from sampled establishments. BLS field economists initiate contact with these establishments to collect information on wages, the cost of benefits, and the incidence and provisions of benefits. The collected data are then used by the BLS to generate estimates for the ECI, as well as the ECEC and data on the cost, coverage, and provisions of benefits. The BLS conducts updates for the ECI and ECEC over a 6-week period, specifically for the pay period that includes the 12th day of the month, for reference periods occurring in March, June, September, and December. This periodic data collection ensures that the ECI remains up-to-date and reflective of current labor market conditions.

Revisions to the Employment Cost Index Data

The data for the Employment Cost Index undergoes certain revisions to ensure accuracy and account for seasonal variations. While Employment Cost Index estimates are considered final upon publication and typically do not undergo revisions, there is an exception for the 3-month seasonal series. These series are revised every March release for the previous five years.

Seasonal adjustment factors are calculated annually to account for regular events that impact wage and benefit changes throughout the year. These adjustments help observe cyclical and nonseasonal movements in the series. The Employment Cost Index employs both direct and indirect seasonal adjustment methods, with revisions made to historical seasonally adjusted data. These adjustments ensure accurate analysis of underlying trends in wages and benefits.

Interpretation of the Index

The Employment Cost Index provides insights into changes in average compensation paid by employers over time, taking into account the industrial-occupational composition of employment. The index is presented as an index number that sets the value of the base period as 100 and represents increase or decreases in prices from the reference period. For example, a figure of 110 indicates a 10% increase in price since the reference period, while a value of 90 indicates a 10% decrease. All current indices have a base period of December 2005, which is used as the reference period with an index of 100.

Movements in the index can be measured as changes in index points, but it is more meaningful to interpret them as percent changes. To calculate the percent change in the Employment Cost Index, you divide the index value at the end of a specific quarter by the index value at the beginning of that quarter. Then, subtract one from the result and multiply it by 100 to scale it as a percentage change. This calculation helps determine the relative increase or decrease in the index between the two periods.

It is important to note that Employment Cost Index serves as an indicator of wage pressure and is closely tied to inflation. When it shows a steepening trend line or a larger-than-expected increase, it is considered an inflationary tailwind. This implies that compensation is rising before companies raise prices for consumers. Furthermore, an upward sloping trend in the index generally signifies a strong and growing economy.

Using ECI for Escalation

The ECI is a valuable tool for wage rate escalation because of its comprehensive nature and focus on measuring the pure change in labor costs. Unlike other indices, the ECI captures not only wages and salaries but also employer costs for employee benefits, making it a robust indicator. Furthermore, the ECI considers nearly all employees in the civilian economy, providing a broad representation of labor costs across various industries and occupations.

One key advantage of using the ECI for escalation purposes is that it is not influenced by changes in the relative employment of industries and occupations with different wage and compensation levels. This means that the ECI reflects the actual change in labor costs, independent of shifts in the composition of the workforce.

It is important to note that the ECI is distinct from the Consumer Price Index (CPI), which measures changes in the price of a basket of consumer goods for urban consumers. While the CPI focuses on consumer prices, the ECI concentrates on labor costs.

Upcoming Data Releases

The release of ECI data for the third quarter 2023 is scheduled for October 31, 2023. Detailed information regarding the national data releases for the Employment Cost Index (ECI) can be found here.

Additionally, the ECEC June 2023 is scheduled to be released on Sep. 12, 2023. A comprehensive schedule of national data releases for ECEC can be found here.

Author: Prarthana Magon is an Undergraduate Research Assistant at Eller Business Research Center.