Private-Sector Wages Help Drive Up Employment Costs in 2017 -- 2nd Update

Compensation for American workers accelerated in 2017, signaling that historically low unemployment might be starting to put upward pressure on wages and benefits.

The employment-cost index, a measure of wages and benefits for civilian workers, rose 2.6% over the past year, matching the largest annual increase since 2015, when compensation also increased at a 2.6% rate, according to Wednesday's Labor Department report. Growth in the index hasn't exceeded 2.6% since 2008.

"We are starting to see the elements that drive wage growth (picking up)" said Gregory Daco, chief economist at Oxford Economics, pointing to the report's slowly firming productivity growth and inflation.

Despite the faster growth, economists say wages still have room to move higher.

Employment cost growth is "faster than it had been, but it's still shy of what you would expect if we were at or near full employment," said Richard Moody, chief economist at Regions Financial Corporation. "If we were really at full employment, you'd be seeing growth in the 3% to 3.5% range."

A measure of wages for private-sector workers grew 2.8% last year, tying a nine-year high. The gains came from leisure and hospitality, and retail trade, which Mr. Moody said isn't surprising given that many of the firms in these industries raised minimum wages for workers last year.

Meanwhile, wages and salaries for government workers remained subdued at 2.1% year-over-year.

The rise in overall costs suggests employers may be feeling pressure to raise wages or boost benefit offerings as the supply of available workers shrinks. The unemployment rate has remained at a 17-year low for three months.

The employment-cost index rose a seasonally adjusted 0.6% in October through December, matching the expectations of economists surveyed by The Wall Street Journal.

Wages and salaries, which account for 70% of total compensation, rose 0.5% from the prior quarter. Benefit costs -- which include health coverage, retirement benefits and paid leave -- advanced 0.5%.

The growth in labor costs varied across industries. U.S. firms' costs of covering employee health care rose 1.1% for the year ending in December, the smallest increase since 1995, the Labor Department said.

"Firms have been passing a bigger portion of health care costs onto workers in the form of higher premium costs," Mr. Moody said. "In some ways it's shifting the burden of costs."

Private workers saw compensation rise 0.5% in the fourth quarter, a slowdown from the previous quarter. Meanwhile, state and local government workers saw compensation pick up in the fourth quarter to a 0.8% increase.

Other metrics have pointed to modest wage growth. Average hourly earnings for private-sector workers rose 2.5% in December from a year earlier, the Labor Department reported earlier. This is similar to the pace maintained over the past three years.

Write to Sarah Chaney at sarah.chaney@wsj.com

(END) Dow Jones Newswires

January 31, 2018 12:32 ET (17:32 GMT)