High unemployment restrains wage growth

WASHINGTON (AP) - Wages and benefits rose by the smallest amount on record in the 12 months ending in September, as high unemployment limits the income growth of workers still receiving paychecks.

With employers cutting costs to maintain profits, they are sharply reducing the rate of growth in total compensation, economists said.

The average cost of wages, health care and other benefits increased 1.5 percent in the year ending in September, the smallest gain since records began in June 1982, the Labor Department said Friday.

Annual increases in the department's Employment Cost Index have been more than cut in half since December 2007, when the recession began. That month, the index grew 3.3 percent over the previous year.

Wages and benefits rose a seasonally adjusted 0.4 percent in the July-September quarter, the same as the second quarter and matching analysts' expectations. That narrowly beat the 0.3 percent rise in the first quarter, the smallest on record.

The index tracks the average cost to employers of each hour worked, so it doesn't reflect layoffs and other changes in the size of a company's work force.

Rising unemployment means employers can keep workers without having to offer higher salaries, while also making it difficult for people with jobs to demand higher compensation.

Wages and salaries, which make up about 70 percent of the index, also rose only 1.5 percent in the past year, down from a 3.4 percent pace in the year ending December 2007.

Benefits, meanwhile, increased 1.6 percent, down from 3.1 percent growth in the year ending in December 2007.

Benefits include vacations, holidays, overtime pay, some bonuses, and health and life insurance.

Jennifer Lee, an economist at BMO Capital Markets, wrote in a note to clients that benefits were rising at a 7 percent clip as recently as 2004, nearly five times the current level.

"This is the new norm," she wrote.

IBM, for example, said Thursday it is eliminating co-pays and deductibles for its U.S. employees when they visit family doctors and other general practitioners. While that's an added benefit, its intended effect is to encourage more preventive care and restrain rising health care costs, the company said.

Economists also monitor the index for signs that rising wages could push up inflation, but few analysts see any sign of that happening. Many believe the Federal Reserve will not begin worrying about inflation and the need to boost interest rates until the unemployment rate begins to drop.

The Commerce Department said Thursday that the economy grew at a 3.5 percent pace in the third quarter, snapping a record streak of four straight quarterly declines.

But the economy isn't growing quickly enough to spur much hiring. The unemployment rate reached 9.8 percent in September, a 26-year high, and many economists expect it to peak above 10 percent early next year.

The Employment Cost Index report showed that health care costs for private-sector employers are still rising. The cost of health benefits increased 4.7 percent in the 12-month period ending in September, up from 3.9 percent a year earlier.

Health care benefits comprise only about a quarter of all benefits, and a Labor Department analyst said the figure should be used with caution, because many companies that respond to its surveys don't provide that information.