Rising labor costs indicate that inflation is here to stay

Increased labor costs in the U.S. for the second quarter indicate that high inflation could continue even after 2021 as global supply chains remain strained. 

The Labor Department said on Friday that the Employment Cost Index (ECI), used to measure labor costs, rose 0.7% last quarter after gaining 0.9% in the January-March period.

The year-on-year rate of increase rose to 2.9%, the largest gain since the fourth quarter of 2018, from 2.6% in the first quarter, reported Reuters.

Companies are increasing wages and benefits to attract workers leading to a hike in labor costs. A record 9.2 million job openings existed at the end of May and yet 9.5 million people are officially unemployed. The economy is facing a shortage of workers.

Lack of affordable child care and fears of contracting the coronavirus has been blamed for keeping workers, mostly women, at home. There have also been pandemic-related retirements as well as career changes, mentioned in the Reuters report.

Federal Reserve Chair Jerome Powell acknowledged the worker shortage but said "Americans want to work, and they'll find their way into the jobs that they want. It may take some time, though."

Republicans blame the labor shortage on the $300 weekly government aid given to workers. Twenty Republican states have disbanded the government aid way before the scheduled date in September. The evidence to support an increase in hiring after this move is limited.

Inputs from Reuters

Picture Credits: Financial Times