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Employer spending on compensation and benefits rose 1.1% during the quarter ending in September, slightly more than economists had predicted, according to Bureau of Labor Statistics data released on Oct. 31.
Compensation spending grew 4.3% year over year, down from 5.2% YOY growth in Q2 2022. The index peaked last year, when employer spending on wages and benefits grew around 5% from 2021 for three consecutive quarters.
Pay raises remain historically high. This recent data from the Employment Cost Index (ECI) shows “wage growth is not necessarily slowing as fast as we’ve seen in a few of the other measures,” Cory Stahle, economist at Indeed, told HR Brew. Other data tracking compensation, such as the hourly earnings measure published in the monthly jobs report, have shown “a little more [of a] dramatic pullback,” he added.
Part of the reason the ECI shows a more moderate slowdown in pay than other trackers is because “volatile” types of pay, such as those earned through commission, are included in the dataset, Stahle said. When you exclude this volatile pay, compensation costs grew at a more moderate year over year rate of 4% last quarter, he noted.
Still, employers continue to spend much more on compensation and benefits today than they did in 2019, when costs grew 2.7% year over year, on average.
To lower wages, or not to lower wages? Aside from government data, there are other signs firms are starting to pull back on pay. A survey by consulting firm Mercer found employers are budgeting less for pay raises next year, and Walmart recently lowered starting compensation for some entry level roles. HR pros have to tread a careful line when making these decisions, Stahle said, given demand for labor in certain sectors remains high.
The fact that compensation costs are coming down indicates employers believe inflation—and in turn, wage pressures—will continue to lower in the coming year, Stahle said. Average consumer prices have been gradually slowing in 2023; inflation hovered at 3.7% in September, down from a peak of 9.1% in June 2022.
On the other hand, the labor market remains tight, particularly in historically low-paying industries like childcare. There were 9.6 million job openings in September, about 1.5 for every unemployed worker.
“Labor markets are still tight enough that competing for talent should still be at the front of employers’ minds,” Stahle said. Should employers drop wages at a time when many sectors are still struggling to hire, they “might be doing that somewhat at their own peril.”