American employers faced with an ongoing labor shortage have had to dig deep into their bank accounts to compete for workers — so much so that wages and benefits paid in 2021 rose at their highest rate in two decades.

                By                    Vance Cariaga

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The nation’s latest employment cost index (ECI) — which tracks wages and benefits paid — rose 4.0% last year, according to a report released last week by the U.S. Department of Labor. That was the biggest annual increase since 2001. The ECI climbed 1% during the 2021 fourth quarter, just below the previous quarter’s record gain of 1.3%, the Financial Times reported.

Last year’s increase was mostly driven by employers doling out higher salaries in the tight labor market, which has seen record numbers of workers quit their jobs in recent months. The current labor market is at or near maximum employment, Reuters reported, with 10.6 million job openings at the end of November.

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The one piece of encouraging news for employers is that the fourth-quarter ECI increase was slightly lower than the previous quarter, and also came in below most estimates. Economists polled by Reuters expected the ECI to increase 1.2% in the fourth quarter.

For workers, the rise in pay is a welcome development in an economy that has been hit with the highest inflation in four decades. Average wages rose 4.5% in 2021, while benefits rose 2.8%. That might sound good, but neither of those figures can keep pace with inflation, which has been growing at 6% and higher. Employers in the services sector got the biggest pay hikes, with their average earnings rising 7.1%.

In addition to tracking worker pay and labor costs, the ECI is considered a key indicator of core inflation, which the Federal Reserve hopes to tame through interest rate hikes. The latest ECI report adds even more weight to speculation that the Fed will raise rates in March, economists say.

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“[The report] turns the chances of a 50-basis point rate hike in March from a remote possibility to something the FOMC will consider seriously,” Bloomberg Economist Anna Wong notes. “However, it will take additional inflationary shocks for a 50-basis point hike to become Bloomberg Economics’ central scenario.”

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