To get a handle on the wage inflation situation, we need to look at more than just increases in wages. If an increase in wages of, for example, 3 percent is accompanied by an increase in worker output of 3 percent, then the cost to the employer is unchanged. In economic lingo, the productivity of the worker has increased enough so that the unit labor cost has stayed the same. So, if we could get our hands on some data concerning productivity and unit labor costs, we could make a determination of whether all this hoopla about wage inflation made any sense.

Well, it turns out that the Department of Labor's Bureau of Labor Statistics calculates and reports on productivity and unit labor costs for the general economy on a quarterly basis. And, every now and then, between the quarterly reports, they publish revisions to the data. Yesterday the bureau released its lastest revision on the data for the first quarter of 1996. The preliminary estimate for the second quarter will not come out until August 14, about six weeks after the end of the quarter.

The productivity and costs report breaks out the data into five different categories; but, the data that economists pay the greatest attention to is that for the nonfarm business sector. Yesterday's report showed that the revised first-quarter seasonally-adjusted annual rate of change for nonfarm business productivity was +2.1 percent. This compares with changes of -1.0 percent and +1.7 percent in the fourth and third quarters of 1995.

Over the past forty-five years the year-over-year percent change in unit labor costs has loosely tracked the year-over-year percent change in the Consumer Price Index (CPI). At times the costs indicator has been higher than the CPI. At other times it has been lower. But, the two indicators have more or less risen and fallen at the same time.

The revised first-quarter seasonally-adjusted annual rate of change for nonfarm unit labor costs was +1.2 percent. This compares with changes of +4.9, +2.3, +2.5, and +3.8 percent in the first through fourth quarters of 1995. So, the first-quarter 1996 annualized percent change was far and away better than the reading for any quarter last year.

I can see how the 3.8 percent fourth quarter number might have made some people nervous. It didn't come out until the middle of February, and the first cut at the first quarter number didn't come out until May 16. So, for three months, investors were looking at a big number that might well have become bigger during the first quarter. But, now that we have both the original and revised numbers for the first quarter, maybe stock and bond market participants will focus their attention on the real growth of the economy instead of indulging in flights of fantasy about the growth of labor costs.

Byline: Lafferty (MF Merlin)