Job Benefit Bounce: Employment Costs Rise 0.6%

U.S. employment costs rose modestly in the first quarter, reflecting an acceleration in the cost of benefits such as pensions.

The Labor Department says that its Employment Cost Index rose 0.6 percent for the three months ending in March. It was the biggest quarterly gain since a similar 0.6 percent rise in the third quarter of 2008. Economists had expected a smaller 0.5 percent increase.

Even with the slight uptick, employment costs remain subdued, rising by just 1.7 percent for the 12 months ending in March as the worst recession since the 1930s Great Depression has kept a lid on employee compensation.

The new data comes as the number of Americans filing claims for unemployment benefits dropped for a second consecutive week, further evidence that the U.S. job market is slowly improving.

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That 12-month gain is about half of the increase in compensation that workers were receiving before the recession struck. For the 12 months ending in December 2007, the employment cost index had risen by 3.3 percent.

With more than 8 million jobs lost over the past two years, employees have not had the bargaining power to demand higher wages.

The slight uptick in the first quarter reflected a jump in benefits which rose by 1.1 percent during the first three months of the year, compared to a 0.5 percent for the final three months of last year.

Analysts said much of the increase reflected larger contributions by employers to defined benefit pension compensation plans.

Wages and salaries, which make up 70 percent of employee compensation, actually slowed in the first quarter, rising by 0.4 percent, after a 0.5 percent gain in the fourth quarter of last year.

The slowdown in employment compensation over the past two years has helped keep inflation pressures low, giving the Federal Reserve the leeway to drive interest rates to the lowest levels on record and keep them there in an effort to jump-start the economy.

At its meeting this week, the Fed repeated its pledged to keep rates exceptionally low for an extended period, a pledge that economists means the central bank will not start raising rates until the end of this year at the earliest.

The 0.6 percent rise in the Labor Department's Employment Compensation Index for the first quarter followed five straight quarterly increases of 0.4 percent.

While low inflation gives the Fed leeway to worry more about growth, economists are worried that if incomes don't start rising at a stronger rate, households won't have the resources to boost personal spending, which accounts for 70 percent of total economic activity.