Washington, April 26 (Bloomberg) -- Labor expenses for U.S. businesses accelerated inthe first quarter as wages and benefits such as health insurance increased, governmentfigures showed. The employment cost index rose 1.1 percent in the quarter ended March 31 after rising0.9 percent in the previous three months, the Labor Department said. Labor costs rose4.1 percent in the 12 months ending in March. That compares with a 4.3 percent rise inthe 12 months ending in March of last year. Slower economic growth may help contain labor costs in coming months, analysts said.Tame labor costs make it easier for Federal Reserve policy makers to reduce interestrates and bolster an economy that grew in the fourth quarter at the slowest rate in 5 1/2years. ``With the economy slowing, we're probably not going to see any wage pressures in thefuture,'' said Stuart Hoffman, chief economist at PNC Financial Services Group inPittsburgh. Analysts expected a 1.1 percent increase in first-quarter employment costs, according toa Bloomberg News survey. Labor costs account for about two-thirds of the final costs ofgoods and services. A separate report from the Labor Department showed first-time claims for stateunemployment benefits rose by 18,000 last week to 408,000 -- the highest level sinceMarch 1996. Fed officials have lowered their target for the overnight bank lending rate by 2 percentagepoints to 4.5 percent since the start of the year to help boost growth. The economyexpanded at a 1 percent annual rate in the fourth quarter. And in the first quarter, theeconomy probably grew at a 1.1 percent annual rate, according to economists surveyedby Bloomberg.
`Greater Latitude'
Benign inflation may give Fed policy makers room to keep lowering interest rates ifneeded. ``Inflation still is very low by longer-term historical standards and it's expected tostay low,'' said Alfred Broaddus, president of the Federal Reserve Bank of Richmond thisweek. ``That gives the Fed greater latitude to deal with any additional economicweakness,'' he said. The employment cost index measures the cost to companies of employing a givenworker at a given time, with adjustments to spread cost increases over the course of ayear. Wages and salaries make up almost three-fourths of the index. Employer-paid healthinsurance premiums account for about 5 percent. Social Security taxes, the cost ofvacation and sick leave pay, and pension benefits account for the remainder. Wages and salaries rose 1 percent during the first quarter after rising 0.8 percent in thefourth quarter. In the 12 months ending in March, wages and salaries rose 3.8 percent,compared with a 4 percent increase in the 12 months ending in March 2000.
Cost of Benefits
The overall cost of benefits, such as referral bonuses, health insurance, vacations and theemployer-paid portion of Social Security taxes, rose 1.3 percent in the first quarter afterrising 1 percent in the fourth quarter. In the 12 months ending in March, benefit costsrose 4.7 percent, compared with a 5 percent increase in the 12 months ending in March2000. Hospital companies have been reporting higher first-quarter profits on increased pricesand more patients. For HCA-The Healthcare Co., the biggest U.S. hospital company,profits rose 8.2 percent after the company raised prices 6 percent to 8 percent for healthinsurers. Tenet Healthcare Corp., the No. 2 U.S. hospital chain, said earlier this month profit rose30 percent for the fiscal third- quarter ended Feb. 28 as it also treated more patients andgot higher premiums from insurers. Insurers are passing at least a portion of these premium increases along to employersand other customers and that is helping to underpin benefit costs, analysts said. ``The pressure from higher medical costs will be with us for some time,'' said VincentBoberski, a senior economist at Dain Rauscher Inc. in Chicago.
Absorbing Cost Increases
Instead of boosting prices on goods and services, some companies are absorbing anyincreases in labor costs. Rising labor costs are apparent at airline companies. The tentative agreement reached this week between Delta Air Lines Inc. and its pilotsunion will cost the third-largest U.S. airline between $2 billion and $2.7 billion, analystssaid. Delta pilots' wages will rise 24 percent to 39 percent, depending on the planes theyfly and their seniority, by the end of the four-year contract. As a result, other airlines will find it harder to keep their labor costs from rising, they said. Six airlines last week, including AMR Corp's American Airlines, the world's largest basedon passenger miles, reported first-quarter losses because business travel fell and laborand fuel costs climbed. The airlines' biggest expense, labor, has soared as carrierssigned new worker contracts. Labor costs rose more than 20 percent at both UAL Corp.'sUnited and Northwest Airlines Corp.