What is the Employment Cost Index?

Each year, quarterly to be exact, international labor organizations provide a detailed report called the employment cost index (ECI) that measures the growth of compensation and the cost of civilian labor by individual industries. The report is used by companies to measure the change in the cost of labor based on variable factors. The index is sometimes referred to as the “weighted average hourly cost of an hour of labor.”

The employment cost index is actually based on a random survey of company payrolls in the final month of each quarter. The data is pulled from employer payroll records provided by quarterly mandated employer wage statements and reports. This data is displayed according to industry and no direct or confidential information is provided about the companies or employees.

The purpose of the report is to evaluate if certain types of jobs are more costly, which gives companies the opportunity to adjust wages and other key benefits for the civilian working population. It provides evidence of the cost of each hour of labor that is performed by the civilian workforce. On average, the employment cost index is a good indicator if a business is profitable based on the findings of the report.

Another use for the employment cost index is as a gauge for the overall economy. If wage costs are on the low side while stock prices are on the mid to high level, this indicates that the economy is in good standing in any given region or industry. If the index rises above the profitability rates, the economy is suffering and businesses have the choice to either reduce their workforce or lower pay rates to stay afloat.

Despite its usefulness, the report has been criticized by business analysts because it tends to represent outdated data, pulled from previous quarters. Its delayed nature still leaves it as a somewhat less timely indicator of employment cost trends than monthly employment reports produced by national employment bureaus. In this respect, companies can maintain their own records of employment data to best monitor employment costs monthly.

In addition to displaying details about wages, the labor employment cost index also provides data about the costs for additional employee benefits. These benefit costs can be associated with health and wellness programs, retirement contributions, sick and vacation leaves, and employer sponsored educational and recreational benefits. The report can be used as a guide to carefully manage all aspects of benefit programs in order to manage employment costs overall.