What Is the Employment Cost Index (ECI)?

The employment cost index (ECI) is essentially a tool used to measure the current costs of labor for businesses within the United States.

History of the Index

Originally established in the 1980s, the ECI has been purposed by the Bureau of Labor Statistics to provide people with the most accurate data possible regarding the cost of labor. The ECI is considered a principal federal Economic indicator. It gathers data about how labor costs are changing and how the economy is performing.

What Data Is Captured in the Employment Cost Index?

  • Cost of Wages. Employer monetary compensation paid out to an employee via hourly, commission or salary rates. This accounts for two thirds of the typical employee cost.
  • Cost of Benefits. What employers pay to provide health insurance, retirement plans and paid time off. These benefits make up the remaining one third of the employee cost.

How Is the Employment Cost Index Used?

The ECI measures the whole cost of an employee so that an employer can accurately predict the cost of hiring one or more employees.

1. Adjusting Pay

If the ECI predicts that the cost of wages and salaries have gone up 1.5% over the year, this information can allow businesses to stay competitive by giving their employees a 1.5% raise. Businesses can also leverage this statistic by providing larger raises of 3-5% in order to attract and retain more talent.

2. Adjusting Benefits

Employers can leverage this information by ensuring that they are offering the same types of benefits that their competitors are offering. As in the example above regarding pay, if an employer wants to raise the bar on their competition, they can always offer additional benefits to increase their recruitment and retention efforts.

3. Mix and Match

Businesses that are struggling to stay competitive in compensation may consider adding additional benefits as a balance of sorts. In some cases, additional benefits can have a much greater and positive effect on workplace culture even when compensation is above average.

How HR Can Use ECI Data to Inform Business Decisions

As a human resources professional, you can make a difference using the data inherent in the ECI.

1. Streamline Recruitment by Attracting Greater Talent

If your business is in line with or above the standards of the ECI, then you can expect a greater pool of qualified candidates to apply. This not only increases your total pool of candidates, but also makes it much more likely that compromises on either end will need to be made in order to acquire them.

On the opposite end of the spectrum, if you find yourself in an organization that has lower than average standards as compared to the national average, you can then be aware of the high potential to attract high-risk talent. While great employees can come from any facet of life, the further they are from having their needs met will determine their total impact in regards to your business’ bottom line.

2. Improve Retention by Comparing and Contrasting

If you find yourself low on one end of the ECI you can always make adjustments in order to balance your total talent attraction and retention potential. If you find your business is lacking in appropriate compensation, the method to remedy this may simply be onboarding additional benefits.

Adding the ever more popular employee-paid program will not only keep your business from over investing, but will add immediate additional value to your employee culture. Perk programs come to mind here as employees can often save more money than they spend on the participation itself, and if your team is properly educated on how this works it tends to be win-win for everyone.

If you offer a multitude of benefits but still find retention to be a problem, you may need to consider speaking with management about the potential to eliminate low participation benefits in lieu of a company wide raise. Few would balk at the notion of more money in lieu of a barely used benefit.

3. Improving Culture by Influencing Your Decisions-Makers

Let’s assume you aren’t part of the decision-making process at this point. Make the mindset shift that, in truth, you actually are the most important decision-maker in the company. Why? You are the face of the company itself as the employee sees it in most cases.

In your unique position as an HR professional you’ll probably gain the best insight into the true needs and desires of your workforce.

Due to your unique positioning in your business, chances are you have the CEO’s ear as well and using something like the ECI will lend credence and truth to your opinion.

Using the ECI, as well as the insights you’re given by your employees, you can leverage authority and authenticity that may result in that much needed change to your workplace culture.

Current Trends in Employment Cost

In order to give you a leg up on what’s currently trending in the nation in regards to labor cost and economy, peruse the stats listed below.

1. Private Sector Growth Is Accelerating

Non-government funded businesses, or private sectors, have seen a post-pandemic growth of 2.4% rise to an unprecedented 3.1%. A rise in compensation was sure post-pandemic at 2.7%, and has rebounded even higher. Total compensation of benefits and wages are inevitably on the rise and if both can be improved at your business, you’ll no doubt become very competitive in your industry.

2. Benefit Growth Seems Irregular

Benefits by themselves are hard to pin down at the moment. Public sector, or state-funded entities, have the highest benefit offering currently at 2.6% after a drop from a post-pandemic 3.1%. Private sector businesses made a large jump from 2.1% to 2.5% from last year, but are currently back to 2.0% as of June 2021.

Benefits are certainly important and even vital to businesses that can’t compete with wage standards. If your benefit offering is good, however, compensation should still be the primary focus.

3. Wage Trends at All-Time High for Private Sectors

Wage and salary standards exploded post pandemic for the private sector, up from 2.7% pre pandemic to 3.5% post pandemic. In contrast, the public sector saw a major drop from 3.1% to 2.6%.

For the privately owned, non-government funded business owner, wages are the focus for superb talent attraction and retention. Such a high rate of increase, however, may find many stakeholders scrambling for ideas on how to find a way to increase this level of pay. In this case adding additional benefits may be the answer to happier, retained employees until production can boost profit to the level where a raise is back in the running.