More Ways to Look at Wages and Inflation

Monday, February 13, 2023

Wages are on the rise, but so is inflation. Are they connected? To help understand the relationship, BLS recently expanded the availability of inflation-adjusted wage data available from the Employment Cost Index (ECI). Before we go any further, let’s look at some numbers. From December 2021 to December 2022, employer wage costs in private industry increased 5.1 percent. But adjusting for inflation, employer costs for wages fell by 1.2 percent. These inflation-adjusted data are now readily available in the quarterly ECI news release, in the BLS public database, and in new supplemental files.

What is the ECI?

The ECI measures the change in the hourly labor cost to employers, independent of the influence of employment shifts among occupations and industries. Labor costs include wages and salaries and the cost of employee benefits. Costs represent the pay period that includes the 12th of March, June, September, and December. We publish the data on the last business day of the subsequent month.

Wages and salaries are defined as regular payments from employer to employee as compensation for services performed during a specific period. This definition also includes incentive-based pay (such as commissions, production bonuses, and piece rates), cost-of-living allowances, hazard pay, payments of income deferred due to participation in a salary reduction plan, and deadhead pay, or pay given to transportation workers returning in a vehicle without freight or passengers.

A unique aspect of the ECI is that it tracks the cost of employing a fixed set of occupations over time. Much like the BLS Consumer Price Index (CPI) measures the change in the cost to consumers of a fixed basket of goods and services, you can think of the ECI as measuring the change in the cost of compensation for a fixed mix of workers. Changes in the composition of the labor force, such as a move toward lower-paying industries or occupations, do not affect the ECI. As such, the ECI is often considered a true measure of wage inflation.

We gather ECI data through the National Compensation Survey. It is an establishment-based and nationally representative survey that captures data on pay and benefits for a representative group of jobs from a sample of employers. The survey includes private industry and state and local government establishments from across the nation.

Nominal and real wage change

Since we first published the data in the mid-1970s, the headline ECI numbers always focused on nominal change in employer costs—that is, without any adjustment for inflation. Over time, these nominal changes have shown some wild swings, with annual changes in private sector wages above 9 percent in the early 1980s, and typically in the 1–3 percent range throughout the 2010s.

We also have had inflation-adjusted data available, although we didn’t previously highlight the numbers in the quarterly news release. The constant-dollar ECI, or real wage change, could move from negative to positive, based on changes in the CPI. For example, those 9+ percent annual changes in the nominal ECI in the early 1980s, when adjusted for inflation, resulted in a nearly 5-percent annual decline in real wages. More often, the constant-dollar ECI reported annual changes in the range of plus or minus 2 percent.

With recent increases in the CPI nearing 40-year highs, there’s more interest in whether wage growth is keeping up with inflation. Thus, we have expanded the availability of constant-dollar ECI data. The ECI uses the Consumer Price Index for all Urban Consumers (CPI-U), U.S. city average, to adjust for inflation. The process involves rebasing the CPI to match the ECI base period of December 2005. (The published CPI is currently based in the 36-month period from 1982 to 1984.) The following chart shows the nominal and real ECI, plus the CPI, with both the CPI and the nominal ECI equal to 100 in December 2005.

Editor’s note: Data for this chart are available in the table below.

From 2005 through 2013, the rebased CPI roughly matched the index level seen in the nominal ECI. As such, the ECI measure for real wages remained relatively flat, with an average level of 99.9. This basically means wages kept up with inflation. By the end of 2014 the CPI shifted down, mainly due to lower gasoline prices, while the nominal ECI continued to trend upward. From that point forward, the real ECI index began to trend above the base level as wages outpaced inflation. In March 2021, real wages for private industry workers were 7.3 percent higher than in March 2005.

In June 2021, the gap between nominal wages and the CPI began to decrease. The CPI saw the largest 12-month percent change since August 2008, and such elevated levels continued in the following months. The nominal ECI was also seeing record-breaking movement. In June 2021, wages and salaries for private industry workers in nominal dollars increased 3.5 percent since June 2020. This was the largest year-over-year increase since 3.6 percent in March 2007.

As the economy began to open back up after shutdowns from the COVID-19 pandemic, employers struggled to fill positions and retain workers. Employers reported using higher wages to hire more workers and reduce turnover. However, the CPI increased at a faster rate than nominal wages. Consequently, the real wage index began to trend downwards. In March 2022, real wages for private industry workers were 3.8 percent higher than in March 2005, but 3.3 percent lower than in March 2021.

Want to know more?

You can continue to track both the nominal and real ECI data as they are released each quarter. And you can study related data from the National Compensation Survey, including Employer Costs for Employee Compensation, and Benefits publications.