Follow
For anyone who wishes to work in a field related to economics and those interested in following the major trends of the national economy, the Employment Cost Index (ECI) is an important factor to consider. It is frequently used as an indicator of inflation, but the finer points of this number calculated by the Bureau of Labor Statistics has many finer points. The article below explores these aspects of the ECI in addition to providing a basic understanding of its relevance to business and the national economy.
What It Measures
Each fiscal quarter, the U.S. Department of Labor generates an updated figure for the ECI. This number measures the growth of wages and benefits allotted to employees by registered businesses based on a survey completed by employers at the end of each quarter. In essence, the surveys examine the cost of labor, which can include fringe benefits, base wages, bonuses, and other forms of compensation employees receive from their employers.
This creates what is known as wage pressure. The ECI tracks these increases, which can be used to predict rises in overall inflation or changes in price of goods and services. Economic experts contend that a rise in wage pressure is a direct precursor to general market inflation, because employers will often increase wages of employees prior to increasing the prices of their goods or services to the general public. When the ECI rises sharply or simply displays an upward trend, analysts expect a complimentary rise in interest rates and overall industry yields. An upward trend in the ECI also indicates a drop in bond prices.
What It Impacts
The ECI measures all forms of remuneration to employees for their service. Unlike the Employment Situation Report, which measures only wages in its Hourly Cost Figures, the calculated ECI represents the total compensation employees receive, which can take the form of stock options, benefits, and even paid time off from the workplace. These means of compensation are considered to be the bulk of the cost of producing a good or service. In order to find the total cost a business incurs, experts divide the cost of goods sold (COGS) by the selling, general, and administrative expense (SG&A.) Hence, the greater a company’s compensation of its employees, the higher the SG&A figure will be.
Because fiscal analysts consider the Employment Cost Index to be an indicator of a rise in prices at other points in the commodity chain, such as the price for raw materials or the price at which a finished good or service is sold in the public market, they also feel that it is an inevitable sign of inflation in the following fiscal quarters. This becomes critical when the stock market is considered. Perceptions of an impending rise in inflation, along with a concurrent drop in bond prices, will motivate those involved in Wall Street stock operations to move based on predictions for the following quarter. Because while data and hard fact have a decided impact on the macro economic sphere, it’s crucial to remember that stock markets function primarily on image, impression, and intuition.
The FED relies heavily on analysis of the ECI to determine whether or not to cut the price of bonds, which are the currency of interaction between nation-states, keeping economies solvent. Understanding how this figure impacts the reactions of banking and stock exchange institutions is vital for both large firms and individual investors. The Employment Cost Index is one of the major precursors to general market inflation, and therefor permits the vigilant to make wise investment decisions that will echo throughout the fiscal cycle.
