US Labor Costs Slow in 3rd Quarter as Wage Gains Trend Lower

An employee helps a customer at a Chipotle restaurant in San Rafael, Calif., on April 1, 2024. Justin Sullivan/Getty Images

Compensation costs for workers slowed in the three months ending September as wage pressures continued to ease.

The employment cost index (ECI)—a broad measurement of labor costs closely followed by the Federal Reserve—rose by 0.8 percent in the third quarter, down from 0.9 percent in the previous three-month period, according to the Bureau of Labor Statistics.

The July–September reading came in below the consensus estimate of 0.9 percent.

Benefits and wages increased by 0.8 percent, down from the second quarter.

In the 12 months ending September, civilian workers’ compensation costs rose by 3.9 percent, down from 4.3 percent in September 2023. Wages and salaries climbed by 3.9 percent year over year, down from 4.6 percent in the previous 12-month period.

ECI data highlighted a compensation gap between private and public sector workers.

While compensation costs for private industry employees rose by 0.7 percent, state and local government personnel saw their earnings jump by 1.1 percent.

Wage Growth Is Trending Lower

A plethora of data points indicate that wage growth has been easing.

Liz Young Thomas, the head of investment strategy at finance company SoFi, expects further wage deceleration after the latest headline ECI and private-sector ECI numbers.

“Both are on a downward trajectory, and their relationships with quits rates suggest more wage deceleration over the next six months. No wage-price spirals in sight,” Thomas said on social media platform X.

Nominal (non-inflation-adjusted) wage growth soared in the immediate aftermath of the pandemic. Average hourly earnings have surged by more than 18 percent since January 2021, to $35.36. Real (inflation-adjusted) hourly compensation has struggled to catch up, tumbling by about 4.4 percent.

In the immediate aftermath of the pandemic, employers became desperate for workers, with a record 12.2 million job vacancies. While job openings have fallen below 8 million, wage gains have also decreased.

The data indicate slowing wage growth as the overheated U.S. labor market continues to be hampered by various factors, be it the effects of elevated interest rates or slowing demand.

Increases in year-over-year average hourly earnings surged to 5.9 percent in May 2022. By September, they decelerated to 4 percent.

According to the Federal Reserve Bank of Atlanta, the three-month moving average of median hourly wage growth has been trending downward since peaking at 6.7 percent in mid-2022, reaching 4.7 percent in September.

A hiring sign is displayed at a retail store in Buffalo Grove, Ill., on Sept. 6, 2024. Nam Y. Huh/Associated Press

Payroll processor ADP highlighted in its October Pay Insights report that year-over-year pay gains for job-stayers and job-changers dipped to 4.6 percent and 6.2 percent, respectively, “continuing a two-year slowdown.”

Year-ahead earnings growth expectations in the New York Fed’s Survey of Consumer Expectations have flatlined over the past two years.

Market watchers monitor the quits rate as a potential wage growth indicator. If workers voluntarily leave their jobs, the greater employment mobility could signal that they think they can find a better-paying job elsewhere as companies attempt to attract and retain talent.

The number of job quits has also been declining since peaking in April 2022, falling to 3.071 million, the lowest since August 2020.

New York Fed economists say the quits rate and vacancies per searcher are “the most strongly correlated with wage inflation.”

“We then show that quits and vacancies per searcher outperform other standard measures of labor market tightness as predictors of wage growth,” they wrote in a paper earlier this month.

According to Bankrate’s 2024 Wage to Inflation Index, while recent wage gains have outpaced inflation since May 2023, they have yet to fully catch up to inflation.

Cumulative inflation has surged by nearly 21 percent since January 2021. By comparison, wages have climbed by more than 17 percent in the same span.

The annual report concluded that Americans’ paychecks are poised to recover completely by the second quarter of 2025.

“What was a previously red-hot job market is now a pretty normal-ish job market. Bargaining power, broadly speaking, has also moderated and normalized,” said Mark Hamrick, senior economic analyst at Bankrate.

Despite the slowdown in the headline employment numbers, wage gains remain solid and have been evenly distributed, said Elise Gould, senior economist at the Economic Policy Institute.

“Real (inflation-adjusted) wages are up across the wage distribution when compared with 2019,” Gould said in an October report.

“Growth at the higher end isn’t anything to sneeze at, but the fact that it’s faster at lower parts of the wage distribution means that we’ve seen a compression in wages at least among the bottom 90 percent of the workforce, meaning a reduction in inequality.”