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U.S.Employment Cost Index Shows Quickly Decelerating Benefit Costs2 May 06Employee benefit cost gains for businesses are decelerating even faster than expected. In particular, aircraft manufacturing benefits plummeted in the first quarter, owing to pension funding trends of the last few years. Total compensation costs for private industry rose 0.6% from December 2005 to March 2006. For the first time since 2001, the seasonally adjusted quarter-to-quarter change in wage and salary growth surpassed benefits growth: it rose 0.7%, compared to benefits’ 0.4% gain. In fact, benefit cost growth decelerated rather sharply from a 0.7% increase in the fourth quarter of 2005. The employment cost index (ECI) for group health insurance rose only 4.8% in the year ended in March 2006. This is down from a 7.5% year-over-year increase recorded in the first quarter of 2005, and just slightly more than half of the 9.3% increase seen in 2004. As health insurance premiums moderate, so do benefit costs. Decelerating benefit costs will allow wage and salary growth to accelerate. As a result, Global Insight expects further moderate gains in wages and salaries throughout 2006. Contributing to the deceleration in benefits growth was a significant fall in such costs for aircraft manufacturing. The ECI for benefits, aircraft manufacturing, plummeted 20.9% in the first quarter of 2006 (not seasonally adjusted), more than expected; this same index had risen 36.6% in the first quarter of 2005. This recent volatility is a result of dramatically changing employer contributions to defined benefit retirement plans. Throughout the 1990s, pension funds were fully funded via strong market performance. But in the current decade, earnings fell short of projected costs. As a result, many companies, particularly in aircraft manufacturing, made large contributions to these pension funds. The Bureau of Labor Statistics recognizes these types of contributions as an employer's cost of having employees and thus includes them in calculation of the ECI for benefits and total compensation. Total annual pension contributions are counted in the first quarter of the following year and provide a benefits base that remains unchanged throughout the year. The large increase in first-quarter 2005 reflected an inflated base caused by pension contributions made throughout 2004. Boeing alone contributed more than $4.4 billion to its pension funds in 2004, according to a company news release. During 2005, that funding fell to $1.9 billion, and the base of benefits for all of aircraft manufacturing dropped dramatically in the first quarter of 2006. Changes to ECI Data Included in the Bureau of Labor Statistics' first-quarter ECI release were several changes to ECI data. The North American Classification System (2002) has replaced the Standard Industrial Classification System (1987). The Standard Occupational System (2000) has replaced the Occupational Classification System (1990). Supplemental unemployment benefits and severance pay are no longer included in the calculation of total benefits, and are therefore not included in total compensation. The indices were rebased to December 2005=100 for each non-seasonally adjusted ECI series. As a result of these changes, some ECI series have been discontinued and others have been added. by Katherine Lewis
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