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According to the Labor Department, hourly compensation for workers in nonfarm businesses rose a bigger-than-expected 5.7 percent in the recently ended first quarter. That's up sharply from the 2.7 percent increase workers enjoyed in the fourth quarter of 2005.
Even after you factor in inflation, hourly wages in real terms grew an impressive 3.6 percent in the first three months of the year. That's a welcome turnaround from the end of 2005, when real wages fell just under 1 percent.
Now, under normal circumstances, news like this would have sent stock investors heading for the hills, since higher wages are viewed by many as an inflationary force unto themselves.
But Uncle Sam had good news to report on the inflation front. While wages rose at the start of the year, so, too, did the productivity of workers who received the higher pay. In fact, worker output per man-hour jumped 3.2 percent, after slipping 0.3 percent at the end of 2005.
Since workers were able to produce more goods in exchange for the higher hourly pay, unit labor costs—the most important wage-inflation gauge—grew by only 2.5 percent in the first quarter. In fact, the increase in unit labor costs is actually down from the 3 percent rate witnessed in the fourth quarter.
To be sure, many on Wall Street expected that unit labor costs would grow at an even slower pace—by less than 2 percent for the start of the year.
But in an environment where economists are worried about the health of consumers—who are facing higher gas prices, rising interest rates on loans, and stagnant home prices—slightly higher unit labor costs are probably a price that companies are willing to pay to prop up the consumer economy.
