U.S. employment costs post smallest increase on record

WASHINGTON (REUTERS) - U.S. labor costs in the second quarter recorded their smallest increase in 33 years amid tepid gains in the private sector, but it likely was a temporary setback against the backdrop of diminishing labor market slack.

The Employment Cost Index, the broadest measure of labor costs, edged up 0.2 per cent, the Labor Department said on Friday. That was the smallest gain since the series started in the second quarter of 1982 and followed an unrevised 0.7 per cent increase in the first quarter, Economists polled by Reuters had forecast the employment cost index rising 0.6 per cent.

The deceleration in labour costs in the second quarter likely does not suggest a material slowing in wage growth, as commissions inflated worker compensation at the start of the year. Labour market slack has diminished significantly over the last few years, which is expected to start putting upward pressure on wages.

At 5.3 per cent, the unemployment rate is close to the 5.0 per cent to 5.2 per cent range that most Federal Reserve officials consider consistent with full employment.

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack. It is also considered a better predictor of core inflation.

Wages and salaries, which account for 70 per cent of employment costs, rose 0.2 per cent in the second quarter. They had increased 0.7 per cent in the first quarter.

Private sector wages and salaries also rose 0.2 percent after gaining 0.7 per cent in the prior quarter.

In the 12 months through June, labor costs rose 2.0 per cent, the smallest 12-month increase since last year, and slipping further below the 3 per cent threshold that economists say is needed to bring inflation closer to the Fed's 2 per cent medium-term target.