Because labor costs comprise nearly two-thirds of the value of final output, some economists
believe that they are an important determinant of the rate of inflation. However, changes in the
rate of growth of labor costs must be read with care. Wage increases can be driven by
productivity increases, tight labor markets, inflation, or fears of inflation. One way to determine
the force or forces driving wage increases is to examine what happens to per-unit labor costs. To
this end, two major measures of labor cost are available, a comprehensive measure of wage and
benefit costs, the employment cost index, and per-unit labor costs in the nonfarm business sector.
The growth rate of both measures of labor cost generally showed a tendency to accelerate during
the expansions of the 1980s and 1990s as labor markets tightened. Subsequent recessions and
growing unemployment had a depressing effect on the rise in both measures. During the
expansion beginning in 2002, the rate of increase in both measures was fairly comparable to the
inflation rate (meaning real wage growth was low) even as the unemployment rate fell.
Current data for the employment cost index can be accessed at http://www.bls.gov/news.release/
pdf/eci.pdf.
Current data for per unit labor costs can be accessed at http://www.bls.gov/news.release/pdf/
prod2.pdf.