A clear indicator of the compensation costs undertaken by a business, finance professionals closely watch the Employment Cost Index for signs of inflation and other cost trends. The ECI is also monitored by the Federal Reserve to establish monetary policy. Numbers revealed by the ECI can point towards economic overheating and possible inflation in the near future. Rising compensation costs in small businesses usually affect consumers as they account for substantial corporate expenses.
For small businesses especially, compensation costs account for a majority of expenses, regardless of the nature of the business. Small businesses can calculate these costs by dividing the total costs of goods sold by the total expenses towards administrative and general purposes. This ratio will vary with each company and is helpful in analyzing vital inter-industry trends.
Apart from judging economic growth, small businesses can also use the employment cost index to calculate their own productivity. If productivity gains are found to be lower than proportional gains from the ECI report, businesses will find it challenging to maintain a balance and keep lower end-prices for consumers. Small business owners and investors should also compare productivity figures of the ECI and the total to keep track of their stake inside the industry. Investors are advised to pay close attention to relative percentages calculated by the ECI.
The biggest advantage of ECI is that it calculates the total employee costs and not just the regular wage. This includes employee bonus pay and small business employee benefits like pensions, health insurance, etc. The employment cost index is a measure accepted by business leaders and the U.S. federal government. The data provided by the ECI can be either with or without seasonal adjustments. The change rates recorded by the index are inclusive of the previous quarter.
One of the biggest setbacks of the ECI is its frequency. As it is released on a quarterly basis, it only covers a slight overlap as well as a portion of the mid-month. The index can also be volatile during specific quarters owing to commission payments or periodic bonuses. For current ECI reports, visit the U.S. Bureau of Labor Statistics.