U.S. employment costs rose by more than expected in the first quarter this year, a government report showed on Thursday, as wage growth remained modest but benefit costs surged again.

The Labor Department (search) said the Employment Cost Index (search), a broad gauge of what employers pay in wages and benefits, rose 1.1 percent in the first three months of the year compared with a 0.8 percent rise the previous quarter.

The jump was the largest quarterly increase in a year and above Wall Street's forecast for a 0.9 percent gain.

Benefit costs advanced 2.4 percent — the largest three-month rise since a 2.7 percent leap in the third quarter of 1982 — after a 1.4 percent increase in the fourth quarter. A Labor Department official said the first quarter's gain was largely due to a rise in payments by companies to defined benefit pension plans.

Wages and salaries gained a more modest 0.6 percent after a 0.5 percent rise the previous quarter, which was the slightest rise since the last quarter of 2002.

"Although benefits contribute only 30 percent to total compensation costs, two-thirds of the increase in compensation costs was attributable to rises in benefit costs during the December 2003 to March 2004 period," the department said in the report.

Financial markets scrutinize this data series because subdued wage costs have helped contain inflation and allowed the Federal Reserve (search) to hold interest rates at 1958 lows of 1 percent since June last year.

But a resurgence in job growth and a pickup in the March consumer price index has focused attention on the Fed's next move, with many analysts expecting it to start signaling a tightening bias over the coming months.

On a 12-month, unadjusted basis, compensation was up 3.8 percent in March, with wages and salaries rising 2.5 percent and benefit costs surging 6.9 percent.