Published: Friday, 31 Jul 2009 | 12:05 PM ET

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Employment compensation for U.S. workers has grown over the past 12 months by the lowest amount on record, reflecting the severe recession that has gripped the country.

The Labor Department said Friday that employment costs rose by 1.8 percent for the 12 months ending in June, the smallest annual gain on records that go back to 1982.

The department said that for the April-June quarter, its Employment Cost Index rose by just 0.4 percent, just slightly above the 0.3 percent rise in the first quarter, which had been the smallest quarterly gain on record.

Companies, struggling to cope during the current hard times, have been laying off workers, trimming wage gains and holding down overtime to save costs.

The 1.8 percent increase in overall compensation for the past 12 months included a record low 1.8 percent rise in wages and salaries, which account for 70 percent of compensation costs.

Benefits, which include such things as health insurance and contributions to pension plans, also rose by 1.8 percent during the past year, the lowest annual gain in this category since a similar increase during the 12 months ending in September 1997.

The rise over the past 12 months was far below the 3.1 percent increase in the 12 months ending in June 2008. Analysts said that with unemployment expected to keep rising even after the recession ends, wages will continue to remain under pressure and inflation will not be a threat.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said that both wages and benefit gains have been cut almost in half over the past year. "As long as this lasts, it is very hard to see anything but downward pressure on core inflation," he said.

In a separate report, the Commerce Department said Friday that the overall economy sank at an annual rate of 1 percent in the April-June quarter, an indication that the severe recession is beginning to hit bottom. The economy had tumbled at a 6.4 percent pace in the first three months of the year.

The Federal Reserve's latest survey of business conditions around the country, which was released Wednesday, found that while economic conditions remain weak, the pace of decline had moderated since the huge decreases in output that occurred at the end of last year and early this year.

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As for wage pressures, the Fed said, "Most districts indicated that labor markets were extremely soft, with minimal wage pressures."

The Fed reported businesses were using various methods to trim compensation costs including freezing wages or even cutting them in some instances.

The Fed report, known as the beige book, will form the basis of discussion when policymakers next meet on Aug. 11-12 to consider what to do with interest rates. Economists widely expect that the Fed will continue to keep its key interest rate, the federal funds rate, at a record low of zero to 0.25 percent, where it has been since last August.

Many economists believe that the Fed will not begin worrying about inflation and the need to boost interest rates until the unemployment rate, now at a 26-year high of 9.5 percent, begins to come down. Some economists expect the jobless rate to peak above 10 percent sometime early next year.

The economy has been hit by heavy layoffs as companies struggle to deal with the severe recession, which began in December 2007.

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