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U.S. Employment Cost Index Increased 0.8% in 4rth Quarter
Courtney Schlisserman in Washington


Jan. 31 (Bloomberg) -- U.S. labor costs rose less than forecast in the fourth quarter, ending a year of the smallest rise in wages and benefits since 1996 and suggesting tame inflation.

The 0.8 percent increase in the employment cost index, a gauge of U.S. businesses' labor expenses, matched the rise of the previous three months, the Labor Department said today in Washington.

Employment costs for all of 2005 rose 3.1 percent, slowing for a second straight year, as companies held the line on wages and passed more of the rise in health care costs to their workers to protect profits. Such limited growth in worker compensation suggests Federal Reserve policy makers may soon bring an end to their run of interest-rate increases.

``We're still seeing compensation at a fairly weak level,'' Tim Rogers, chief economist at Briefing.com in Boston, said before the report. ``Generally we've seen a falling off of benefit costs, with companies passing more on to the employee. The steady pace of salaries is keeping the overall compensation picture fairly steady.''

Economists expected the employment cost index to rise 0.9 percent after a 0.8 percent gain in the third quarter, according to the median of 60 forecasts in a Bloomberg News survey. Estimates ranged from 0.7 percent to 1.1 percent.

The index tracks the cost to companies of wages, benefits and employee-paid taxes such as Social Security and Medicare.

Last year's rise in employment costs was the smallest since a 2.9 percent increase in 1996. Wages and salaries rose 0.8 percent in the fourth quarter after a 0.6 percent rise. For all of 2005, wages increased 2.6 percent.

Inflation

Benefit costs in the fourth quarter slowed to a 1.1 percent increase from a 1.3 percent rise in the previous three months. They were up 4.5 percent last year, the smallest gain since 1999.

Last year, wages failed to keep up with inflation. Including changes in prices, wages and salaries fell 0.8 percent for a second straight year in 2005. Total compensation declined 0.3 percent last year, the first annual decrease since a 0.4 percent fall in 1996.

The data surface as Fed policy makers gather for their first meeting of the year, and Chairman Alan Greenspan's last of his career. The Federal Open Market Committee is expected to raise the benchmark overnight lending rate today for the 14th straight time, to 4.5 percent from 4.25 percent, according to a Bloomberg survey.

Federal Reserve

Some central bankers have indicated that a jump in energy prices is more of a threat to inflation than wages.

``The pass through risk (from crude oil) is a little more present an issue than labor costs right now,'' Richmond Fed Bank President Jeffrey Lacker told reporters on Jan. 18 after a speech in Richmond. ``Compensation costs are lining up pretty well with productivity growth and unit labor costs were pretty good in the second half.''

So far, neither is sparking much inflation. Core U.S. consumer prices rose 2.2 percent last year, matching the average for the last decade and suggesting companies had difficulty passing on higher fuel costs.

``Benefit costs seem to be one segment in which a tighter labor market seems to have little influence on employer generosity,'' Joseph Abate, a senior economist at Lehman Brothers Inc. in New York, said in a note to clients.

Health Care Costs

Some companies are passing some of the rise in health care costs to their employees. Americans paid 17.3 percent of medical care costs last year, up from 17.1 percent in 2004 and 16.9 percent in 2003, according to the Commerce Department.

The unemployment rate in December fell to 4.9 percent, matching the lowest level in four years, the Labor Department said on Jan. 6. The report also showed that hourly earnings had the biggest year-over-year increase since March 2003.

Polo Ralph Lauren has ``aggressive'' hiring plans this year as it opens more stores and increases in-house manufacturing, President and Chief Operating Officer Roger Farah said in an interview on Jan. 18. The company, based in New York, will hire ``several hundred'' people to work throughout the company, Farah said.

Norfolk Southern Corp. plans to hire 1,800 people this year both to ``keep up with attrition and account for some additional growth,'' Chief Executive Officer Wick Moorman said in an interview on Jan. 25. The company, the biggest U.S. rail carrier of auto parts and vehicles, hired 2,400 employees in 2005.

``Those numbers for the rail industry are big numbers,'' Moorman said.

Other companies are trimming staff to maintain profits. McCormick & Co., the world's biggest maker of spices, said on Jan. 25 it plans to cut as many as 1,000 jobs over the next three years.

``We need to stay competitive, we need to find additional money to spend for growth and, as a result, we needed to take money out of the supply chain,'' McCormick Chief Executive Officer Robert Lawless said in an interview.

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