Small rise in Employment Cost Index underscores weak labor market

The Employment Cost Index increased 0.5% in the final three months of 2009, up from the 0.4% rise in 3Q09. Year-over-year, the index designed to measure total compensation gained just 1.5%, the same as 3Q and the lowest level since records began almost 30 years ago.

On the one hand, the scant rise in labor costs, coupled with outsized increases in productivity, allows policy makers to keep their focus on job creation because the data strongly suggest that inflation is not a problem at the present time.

(A noted to those well versed in the theories of economics: this is not an endorsement of the Phillips curve. The lack of inflation at the present time and expectations that price increases will remain tame allow for a loose monetary policy.)

However, the lack of meaningful wage gains (wages make up 70% of the index while benefits account for the remainder) is symptomatic of what's going on in the labor market.

Employers have plenty of qualified applicants to choose from and do not need to compete by offering higher wages, while the deep recession has crimped profit margins, forcing many employers to keep a close eye on expenses. With job insecurities still high, many employees are grateful just to have a job.

Unfortunately, the lack of significant income growth could limit gains in spending, which may also limit GDP growth.