DEFINITION of 'Employment Cost Index (ECI)'

The Employment Cost Index (ECI) is a quarterly economic series published by the Bureau of Labor Statistics that details the growth of total employee compensation. The index is prepared and published by the Bureau of Labor Statistics (BLS), a unit of the United States Department of Labor. It tracks movement in the cost of labor, as measured by wages and benefits, at all levels of a company.

Wages track the amount employers pay in salaries and hourly labor while benefits measure a combination of health insurance, retirement plans and paid time off. Employees typically see their paychecks broken down into these two parts with a lion's share of the payment coming from wages. Employers use the index to evaluate the labor market and the amount of raises they can doll out each quarter.

BREAKING DOWN 'Employment Cost Index (ECI)'

The Employment Cost Index essentially measures the change in total employee compensation each quarter. It is based on a survey of employer payrolls conducted by the Bureau of Labor Statistics in the final month of each quarter. The idea is that wage pressure increases in lockstep with inflation because compensation tends to increase before companies hike prices for consumers. Therefore, it is considered an inflationary tailwind when the Employment Cost Index exhibits a steepening trend line or a greater than expected increase for a given period. In addition, as inflation increases, yields and interest rates also rise, resulting in a decrease in bond prices.

Economists use the index to measure the change in labor costs and gauge the health of the economy. It shows how the cost of compensating employees change each passing quarter. An upward sloping trend generally represents a strong and growing economy. In other words, employers are passing on profits to their employees through wages and benefits.

Employee benefits are calculated as cost per hour worked across 21 benefits, ranging from Social Security to paid time off for holidays. The survey covers all occupation in the private economy, excluding farms and households, and the public sector, minus the Federal government. The BLS publishes estimates for each of these categories in addition to seasonally adjusted and non seasonally adjusted headline numbers. 

How the Employment Cost Index Is Used

Businesses and the federal government use the index to for two different reasons. Employers observe the index to make appropriate adjustments in pay and benefits over time. If the index jumps 2% from the previous year or quarter, an employer may be inclined to give workers an equivalent raise. In some cases, employers may receive a larger raise to attract the best talent. Government agencies, on the other hand, watch the benchmark index to gauge the health of the economy. It can inform officials when the economy is overheating or the state of wage growth.

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