Higher Costs, Less Cash

The Associated Press

Federal study shows wages have fallen flat amid concerns over soaring health care costs and inflation

February 1, 2006

WASHINGTON - Wages and benefits paid to civilian workers rose last year by the smallest amount in nine years, the government reported yesterday, and actually fell when inflation is factored in.

The Labor Department said employee compensation was up 3.1 percent in 2005, an increase that was lower than the 3.7 percent rise in 2004. The slowdown reflected a big drop in benefit costs - items such as health insurance and pensions - which rose by 4.5 percent last year after jumping by 6.9 percent in 2004.

The new Employment Compensation Index should ease concerns at the Federal Reserve that improving labor markets could be starting to push up wage pressures. Wages and salaries rose by 2.6 percent last year, only slightly higher than a 2.4 percent increase in 2004 and below gains of 2.9 percent in 2002 and 2003.

The 3.1 percent increase in total compensation for the 12 months ending in December was the smallest annual increase since a 2.9 percent rise in 1996.

But when inflation is considered, overall compensation fell by 0.3 percent, the first time there has been a decline since 1996, when total compensation after adjusting for inflation was down by 0.4 percent.

The Federal Reserve is keeping a close watch on wage pressures given the strong growth in the labor market in the past two years.

While increases in the number of people working is good for the country, the concern at the Fed is that the economy could be growing so strongly that wage pressures will mount and trigger a rise in inflation.

The report showed that there was a slowing of benefit costs in 2005 as employers struggled to deal with surging health costs. The 4.5 percent rise in the cost of benefits was the smallest increase since 1999. In the past two years, benefit costs surged by 6.3 percent in 2003 and 6.9 percent in 2004 as health-care insurance premiums soared.