Employment Cost Index

Why is it important?

The Employment Cost Index is a measure of labor compensation per hour worked. It includes all wages, salaries, and benefits paid by employers to employees for work done. Wages and salaries are based on the straight-time average hourly earnings, while the benefits include paid leave as well as some employer paid services such as insurance premiums, retirement packages, and contributions to savings schemes among others. The ECP is an important index as it helps in gauging the labor market’s trends. If there is a high work force, the investors may be tempted to decrease their hourly pay since he would have several people competing for the same job. The ECP is released on a quarterly basis.

How is it computed?

Straight-time wage and salary rates are total earnings before payroll deductions such as production bonuses, incentive earnings, commission payments, and cost-of-living adjustments are done. This component does not include premium pay for overtime and for work on weekends and holidays, shift differentials or other non-productive bonuses, which are classified under benefits. The Benefits component includes paid leave such as vacations, holidays, and sick and other leaves or supplemental and premium pay for work beyond the regular schedule as well as shift differentials, and non-production bonuses. This component also includes insurance benefits e.g. life, health, short-term and long-term disability, retirement, savings, and other legally required benefits such as Social Security, Medicare, federal and state unemployment insurance or even worker’s compensation. The bureau of labor statistics compiles all these data and comes up with an average graph on how the payments for work done in hours fluctuate in relation to the amount of money paid for the job.

Impact on forex

Although it does not have a drastic effect on forex rates, the relationship between the index and the forex trade is rather medium as a rise in the employment index may mean that labor force has become scarce and companies have to pay higher wages to get the few workers available. This may affect production, which will eventually affect the forex rates.

Impact on Stock markets

Employment cost index directly affects the investment decisions at the stock market. If an economy has a very low labor force, the economy is likely to slow down due to inadequate workforce to drive production. Investors may fear investing in such a sector since the production rate is a major pointer towards the profit margins of any investment. It would be meaningless to invest in a sector that has no labor to drive production. Investors would therefore be forced to shift their holdings to other sectors.

If investors feel that the ECI is too high and it might not enable their products to compete favorably in the market they may also decide to shift to areas, where there is cheap labor. It is therefore automatic that a well-balanced ECI is likely to attract investors into the country. This clearly indicates that the index will be a major factor to look for when investing. It can therefore greatly influence the movements of shares at the stock market. It is also very important since employment costs are a recurring expense and must therefore be carefully considered when setting up any investment.

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