Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

Let me answer the first-quarter surprise and then the longer-term surprise that you are pointing to. We were, indeed, very surprised by the small increase in ECI hourly compensation in the first quarter. But almost all of that surprise occurred in one component—a huge drop in contributions to pension plans. We have checked with folks in that particular area, and it looks as though that estimated decline in construction probably reflected something that happened in the real world. That is, the combination of the fact that corporations had previously raised their contributions to high levels and the improvement in financial markets, both the stock market and the real estate market in preceding years, suggests that those plans were in better financial shape. There was a decline of 30 percent at an annual rate in that particular component. We do not see that decline as necessarily ongoing or that reduction in payments as an indication of a lower marginal cost of production, so we are not taking a big price signal from that component of labor compensation.

Now that is our excuse for the first quarter. Looking back over a slightly longer haul, compensation per hour has been running below our models, and that could be suggesting a little more slack in labor markets than we are writing down. We have not adjusted our measures of slack partly because the surprises on the price side have not been anywhere near as large as those on wages; they have been, if anything, quite small and not necessarily suggesting that this economy has a lot more room. But the compensation data taken alone suggest less tightness in the overall economy than the product markets would.

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