US labor costs growth slows sharply in third quarter of 2025

10 December 2025

A construction worker is shown at work on a multi-unit residential housing project in Encinitas, California, U.S., July 28, 2025. REUTERS/Mike Blake

New data released on December 10, 2025 show that the growth in labor costs across the United States has cooled, underscoring emerging softness in the labor market and adding fresh context to shifting economic pressures.

The broadest gauge of labor costs, the Employment Cost Index (ECI), rose just 0.8 percent in the third quarter, slightly below economists’ expectations of 0.9 percent growth. On an annual basis, compensation costs increased by 3.5 percent, down from 3.6 percent in the previous quarter.

The moderation reflects slower growth in wages and salaries as well as benefit costs. Wages and salaries rose 0.8 percent in the quarter, matching the overall ECI increase for the period. When adjusted for inflation, real wages increased by a modest 0.6 percent over the previous year, a sign that employees’ purchasing power is barely moving upward in an environment where cost pressures remain significant.

Economists and analysts attribute the slowdown to what appears to be a broader cooling of the labor market. The contraction in wage growth comes even as state and local government pay, as well as benefits, continue to register modest increases. At the same time, inflationary pressures remain elevated, partly driven by import tariffs that keep consumer prices high. That dynamic means many households may feel squeezed even as nominal compensation rises.

One important factor complicating interpretation of these data is that the survey underpinning the ECI was conducted shortly after a 43-day government shutdown. The shutdown disrupted data collection, resulting in lower-than-usual response rates. That has led some economists to urge caution in reading too much into the deceleration while the trend likely signals real softness, it may also partly reflect temporary sampling issues.

For policymakers and markets, the implications are significant. The slower rise in labor costs weakens arguments that wages are fueling inflation, a key concern for the central bank. Indeed, with this data in hand, the Federal Reserve is expected to cut interest rates by 25 basis points in its upcoming meeting, extending a string of reductions this year.

Yet the deceleration in labor costs also raises red flags about consumer spending, which has long been buoyed by rising wages. If wage growth remains muted while prices stay elevated, households may pull back on spending, risking a slowdown in economic growth overall. Analysts note that while labor costs may no longer present an inflation risk, the gap between costs and living expenses leaves little room for increased household consumption.

Markets, for now, appear to be taking the news in stride. The relatively modest increase in labor costs did not trigger dramatic moves on Wall Street, reflecting investor focus on upcoming economic projections by the Federal Reserve rather than immediate shock.

Despite that calm, economists warn that the coming months will be delicate. The dual pressures of persistent inflation and slow wage growth may squeeze households, potentially dampening demand for goods and services. This could stall consumer-driven growth at a time when the economy is already facing headwinds from global uncertainty, supply-chain disruptions, and lingering after-effects of the shutdown.

The latest ECI report underscores a changing tide in labor market dynamics. For workers, modest gains in compensation may not keep pace with living costs. For firms and regulators, the data offers breathing space on inflation, but also signals a labor market that might be less robust than previously believed.

The trajectory over the next two quarters how wages adjust, whether inflation eases, and how consumers respond will likely shape both economic growth and monetary policy heading into 2026.