Private sector wage gains lift US labor costs in Q2, underlying trend benign

Private sector wage gains lift US labor costs in Q2, underlying trend benign

By Lucia Mutikani

Fri, July 31, 2026 at 7:16 PM GMT+3 4 min read

By Lucia Mutikani

WASHINGTON, July 31 (Reuters) - U.S. labor costs increased slightly more than expected in the second quarter as private-sector wage growth picked up, though the underlying trend remained benign and suggested the jobs market was not driving inflation.

The strength in wages last quarter reported by the Labor Department on Friday ‌was concentrated in the goods-producing industries. Job growth accelerated between March and May. The momentum, however, fizzled in June. Economists describe the labor market as being stuck in ‌a "low hire, low fire" state.

"Overall, the report highlights that strong job gains in the quarter did not translate into a meaningful increase in wage pressures," said Priscilla Thiagamoorthy, a senior economist at BMO Capital Markets.

"Policymakers will be reassured ​that, although consumer inflation is still running above the 2% target, at least cost pressures are not coming from the labor market."

The Employment Cost Index, the broadest measure of labor costs, climbed 0.9% last quarter after advancing by the same margin in the January-March quarter, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast the ECI would rise 0.8%.

Labor costs increased 3.4% in the 12 months through June after a similar gain in the year through March. The ECI is viewed by policymakers as one of the better measures of labor market slack ‌and a predictor of core inflation because it adjusts for composition ⁠and changes in job quality.

Wages and salaries, which account for the bulk of labor costs, increased 0.9% in the second quarter after rising 0.8% in the January-March quarter. In the 12 months through June, wages rose 3.2%, the smallest gain since the second quarter of 2021. Wages advanced ⁠3.4% in the year through March. When adjusted for inflation, wages fell 0.3% in the year to June.

Private sector wages and salaries increased 0.9% last quarter after rising 0.7% in the January-March quarter. They advanced 3.1% in the year through June, the smallest rise since the first quarter of 2021, slowing from the 3.4% gain in the prior period. Annual wages dropped 0.4% last quarter when adjusted for inflation.

Stocks on ​Wall ​Street were trading lower. The dollar gained versus a basket of currencies. U.S. Treasury prices fell, with ​the yield on the 30-year bond at a 19-year high.

CONSTRUCTION SECTOR WAGE ‌GROWTH REBOUNDS

The Federal Reserve on Wednesday left its benchmark overnight interest rate in a 3.50%-3.75% range. Three members of the U.S. central bank's policy-setting committee dissented. They "preferred" a quarter-percentage-point hike.

While inflation eased in June, risks are tilted to the upside amid war in the Middle East, now in its sixth month.

The retreat in inflation helped to lift consumer sentiment in July, a separate report showed on Friday. The University of Michigan's Surveys of Consumers' Consumer Sentiment Index increased to a final reading of 55.2 from 54.4 earlier this month. The index was at 49.5 in June.

The improvement was at odds with the Conference Board survey this week, which showed its gauge of consumer confidence falling in July amid a deterioration in perceptions on the labor ‌market.

"Broad-based improvements were seen across all groups by income, education, wealth, age, and political party," said Joanne ​Hsu, the director of the Surveys of Consumers. "Consumers remain focused on pocketbook issues like purchasing power, while political or ​military developments remain more in the background."

The ECI report showed goods-producing industries wages and ​salaries jumped 1.2% last quarter after gaining 0.4% in the January-March quarter. They were boosted by a 1.5% rebound in construction wages after being ‌unchanged in the January-March quarter. Manufacturing wages increased 1.0%.

Wages in service-providing industries ​climbed 0.8%, matching the prior quarter's gain. Wage ​growth in the wholesale trade industry braked sharply, rising only 0.1% after advancing 1.2% in the first quarter. State and local government wages increased 0.9% after rising 1.0% in the January-March quarter. They increased 3.4% in the 12 months through June.

Benefit costs for all workers rose 1.0% after surging 1.2% in the January-March quarter. They increased ​3.8% in the 12 months through June after increasing 3.6% in ‌the year through March. The slowdown over the quarter was mostly in the private sector, where benefits rose 0.9% after shooting up 1.3% in the first three ​months of the year.

"We see limited signs that the labor market is at risk of retightening and putting upward pressure on wages and inflation," said ​Veronica Clark, an economist at Citigroup.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)