US labor costs in the second quarter recorded their smallest increase in 33 years as workers earned less in commissions and bonuses, in what appeared to be a temporary wage growth setback against the backdrop of diminishing labor market slack.
The surprisingly smaller rise reported by the Labor Department on Friday did little to temper expectations that the Federal Reserve is set to raise interest rates later this year. The job market is fast approaching full employment. "Labor market fundamentals are improving, job openings are at record highs, and slack on a steady downtrend. This is precisely how the Fed will interpret this report, even if the numbers here are atrocious," said Eric Green, chief economist at TD Securities in New York. The Employment Cost Index, the broadest measure of labor costs, edged up 0.2 percent in the second quarter, the Labor Department said. That was the smallest gain since the series started in the second quarter of 1982 and followed a 0.7 percent rise in the first quarter.
The weakness in compensation was concentrated in sales, information and wholesale trade, occupations where workers are likely to receive incentive pay. Commissions and bonuses helped lift worker compensation at the start of the year. Excluding commissions, compensation was up 0.6 percent in both the first and second quarters, according to TD Securities. Economists had forecast the employment cost index, widely viewed by policymakers and economists as one of the better measures of labor market slack, rising 0.6 percent in the second quarter. At 5.3 percent, the unemployment rate is close to the 5.0 percent to 5.2 percent range that most Fed officials consider consistent with full employment.