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September, 2001, Vol. 124, No. 9
The Employment Cost Index: what is it?John W. Ruser
The Employment Cost Index (ECI) is a quarterly measure of the change in the price of labor, defined as compensation per employee hour worked. Closely watched by many economists, the ECI is an indicator of cost pressures within companies that could lead to price inflation for finished goods and services. The index measures changes in the cost of compensation not only for wages and salaries, but also for an extensive list of benefits. As a fixed-weight, or Laspeyres, index, the ECI controls for changes occurring over time in the industrial-occupational composition of employment.
This article provides a broad overview of the ECI. Beginning with how the data for the index are collected and how the index is calculated, the discussion draws attention to some of the underlying challenges that are involved in calculating such a complex statistic: What types of data should, ideally, be collected? What data are collected under nonideal conditions? and How are infrequent payments handled? Then, the article addresses a variety of questions that have been raised about the behavior and efficacy of the ECI: How does the index behave over the business cycle? Is it, like the Consumer Price Index (CPI), affected by "substitution bias"? Does the ECI capture emerging forms of compensation, such as hiring and retention bonuses and stock options? and, finally, How does employer cost relate to employee value?
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