08) Economic Indicators: Employee Cost Index

by · October 16, 2010

What It Is

The employment cost index is a report published every last Thursday of the quarter (or every three months) by the Bureau of Labor and Statistics. It covers the previous quarter, with the cutoff set on the last month. The purpose of the report is to measure and evaluate the development or growth of the compensation of employees, including those who are working in non-farm industries. Compensation, at this point, is composed of two things: wages and fringe benefits such as bonuses, regardless of the level of the employee in a company.

Basic Information

The report is based on a survey of employer payrolls. The figures are based on a per-hour basis. All employees, with the exception of those working in the federal government, are included.

The survey is divided into different industry groups, such as occupation workers and union or non-union employees. The sample size for non-farm workers is at 4,500 while that of the local and state government is 1,000. The base weight for the index is at 100, and the base year is December 2005.

This index is used as inflation indicator. This is because as the figures rise, so does compensation. Compensation for employees comprises a huge bulk on the total cost of the company to produce a product or service. You can obtain the figure by dividing both the cost of goods sold and SG&A or selling, general, and administrative expense. All details are found and form part of the company’s income statement. In turn, prices of goods increase to make up for the high compensation cost.

Bond prices tend to increase if the interest rates decrease also because of a decrease in inflation. Moreover, there will be more investors who will sell off their stocks before rate cuts of Feds during the deeper phases of the business cycle.

How the Report Is Valuable

Various factors are being used to determine the total employee cost, including pension, insurance, and even death benefits. Thus, the figures can represent the entire cost spent by the company for the employees and makes it a whole lot better than Employee Situation Report, which includes only the wages. The data are also presented in two ways: with seasonal adjustment or not. So is the rate of change; it includes year over year and the previous quarter.

ECI is very important for the Federal Reserve. This agency keeps track of inflation and uses the information to develop sounder monetary guidelines. The results are less volatile, as they are not affected to any change of employee’s movement from a high-ranking to lower-paying job. It also gets rid of the basket approach used by Consumer Price Index or CPI. It is also used as a lagging indicator and in the calculations of productivity.

Things to Watch Out For

There’s a huge lag time between the releases of the reports. It covers three months. It has the tendency to become volatile once you factor in sporadic bonuses and commissions. An interpretation from an expert may also be needed to fully understand the results of the report. The Employee Situation Report, which is released earlier, prevents ECI from revealing something new about the wages.

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