Sitting on Labor Costs

Employers’ wildly successful fight to cut labor costs will continue into 2005. Although inflation may cool from this year’s oil-inspired highs, wages will barely keep pace with prices as 2005 arrives. Impressive productivity gains will keep labor markets soft and unit labor cost increases extremely low.

    Changes in real hourly earnings continued to fall into negative numbers for five of the first seven months of this year, with the rate of decline surpassing even 2003’s dramatic drop. Lower real wages have not generated higher turnover, however. Quit rates remain at record lows of 1 percent to 2 percent across almost all industries.

    Ongoing workforce reductions, lower real wages and rising productivity pushed unit labor costs down 0.4 percent last year. Inflation-adjusted wages continued to sink in the first half of this year, but benefit costs rose, workforce reductions moderated and productivity growth slowed, pushing unit labor cost increases up slightly to a modest annualized rate of 1.1 percent. The wage and salary component of the Employment Cost Index rose 2.5 percent for the 12 months ending June 2004, well below the rate of inflation, but the benefits component grew 7.3 percent.

    Employers will see fairly flat unit labor costs into 2005, but will have to slash benefit costs to wring additional savings out of compensation. Benefit-cost increases have outpaced wage increases since June 2000 and now stand at their highest level in two decades. Virtually all of the increases can be traced to health-care-benefit costs. The health-insurance component of the Employment Cost Index rose 10.2 percent in 2003 and at an annualized rate of 8.7 percent in the first half of 2004. Companies with extremely aggressive health-care-cost controls have been able to hold increases to 7 percent a year, but this is still an unacceptable number in any industry.