The remarkable absence of wage inflation despite the nation's low unemployment rate will almost surely keep Federal Reserve officials from raising interest rates at their policy meeting Tuesday.

Though price inflation has recently moved higher-the 0.7% April rise in the consumer price index was the largest in eight years-the central bank's monetary authorities are known to place considerable emphasis on wage trends.

And with official joblessness near a three-decade low of 4.3%, the first-quarter employment cost index rose a far lower-than-expected 0.4%. Indeed, the growth in costs decelerated to 3% during the four quarters through March 31, versus 3.7% in the preceding 12 months.

Economists are intrigued by this seeming paradox and offer a host of explanations, including recent impressive productivity gains. First-quarter productivity surged by 4%, including a stunning 5.8% in the manufacturing sector, and unit labor costs rose just 0.3% in the quarter, it was reported last week.

Another explanation-one that carries serious implications-is that a significant portion of compensation has shifted away from traditional wages and toward merit-based substitutes, including bonuses and stock-based rewards like options.

No study has been done, "but mounting evidence suggests broadening use of performance-based compensation across different industries and a deepening within companies to all levels of management and workers," according to Mickey D. Levy, chief economist, and Peter E. Kretzmer, senior economist, at NationsBanc Montgomery Securities, a unit of Bank of America Corp.

Stock options and shares are not included in any standard wage or employment-cost measure, they noted. "Even when options are exercised or gains on stock are realized, they raise personal income but not wages, employment, or unit labor costs."

Stock and merit-based compensation have been substituting for wages and constraining wage pressure, they wrote. This has been especially true during the long bull market in stocks.

The growing use of such compensation also suggests that pay and labor costs have been advancing, albeit in nontraditional and less visible ways, just as might be expected in a tight labor market.

But what if stock values fall?

"Insofar as stock-based compensation effectively shares the rewards and risks with shareholders, any sustained decline in the stock market in an environment of healthy productivity gains could exert upward pressure on wages," wrote Mr. Levy and Mr. Kretzmer.

Nor is that all. Vaunted investor Warren E. Buffett, in his annual letter to shareholders of Berkshire Hathaway Inc., recently renewed his complaint that the use of stock options as compensation effectively hides expenses and exaggerates corporate earnings.

A study by Andrew Smithers cited last month in Barron's found that, if the cost of stock options were fully accounted for, per-share earnings of the S&P 500 companies would have been lower by an eye-popping 56% in 1997 and 50% last year.

Accordingly, stocks' price-to-earnings ratios could be seen as considerably inflated and the market more vulnerable to a serious correction. By this reasoning, shares of the Standard & Poor's 500 companies traded at 63 times their earnings at yearend, on an option- adjusted basis.

"While options are not a labor cost item in the traditional sense, they certainly are a claim on future profits and-or stock appreciation," said Nicholas S. Perna, chief economist at Fleet Financial Group in Boston.

"Through dilution, existing equity owners have to give up some of their rewards when the options are exercised," he said. "Thus, options are very much like an unfunded deferred profit-sharing or bonus plan."

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