15 Compensation and Working Conditions Summer 1997

Explaining the

Differential Growth

Rates of the ECI and the

ECEC

One of the Bureau’s principal compensation surveys—the Employment Cost Index—has been increasing much more rapidly

than its counterpart, Employer Costs for Employee Compensation. The difference stems largely from the fact that the ECI and

the ECEC are designed to measure different things.

BY MICHAEL K. LETTAU

MARK A. LOEWENSTEIN

and AARON T. CUSHNER

Michael K. Lettau and Mark A. Loewenstein are

economists and Aaron T. Cushner is a computer

programmer in the Compensation Research and

Program Development Group, Bureau of Labor

Statistics. Telephone (202) 606-7396.

I

n recent years, the ECI has been

growing at a faster rate than the

ECEC. Specifically, from March 1987 to

March 1996, growth in the ECI wage

index exceeded that in the ECEC by 0.6

percentage point per year, while growth

in the ECI benefits index exceeded that

in the ECEC by 1.5 percentage points

per year.

There are two steps in the calculation

of both the ECI and the ECEC. The first

involves combining job quotes within an

industry/occupation cell to obtain a cell

average. The second involves combining

the cell averages to obtain the final

index. Because the ECI is designed to

measure how compensation paid by

employers would have changed over

time if the industry/occupation composition of employment had not changed

from a base period, while the ECEC is

designed to measure the current cost for

employee compensation, the ECI and the

ECEC do each step differently.

This study calculates two alternative

indexes, which are hybrids of the ECI

and ECEC. These alternative indexes

indicate that differences in both steps of

the calculation of the ECI and the ECEC

are important causes of the ECI’s higher

growth rate. They therefore imply that

employment has shifted toward industry/

occupation cells where wages and

benefits are lower, and employment

within cells is becoming more concentrated in jobs that offer lower compensation.

The BLS has suggested that, while

the ECEC provides information about

average compensation in the economy at

a point in time, the ECI should be used

for examining changes in compensation

over time. However, even though

changes in the ECEC have a different

interpretation than changes in the ECI,

users may still be interested in them. By

comparing the ECEC at different points

in time, one can obtain a measure of the

change in average compensation in the

labor market. For example, a shift in

employment towards lower paying jobs

will be picked up by the ECEC.

Executive Summary
 Compensation and Working Conditions Summer 1997 16

T

he Employment Cost Index,

or ECI, measures changes in

employers’ cost of compensating workers, controlling for changes

in the industrial-occupational

composition of jobs. The ECI is a

quarterly index that is computed

from survey information on a sample

of establishments and jobs weighted

to represent the universe of establishments and occupations in the

economy. BLS also uses data from

the ECI survey to calculate a

measure of the average cost of

employee compensation. This

measure, which is called the Employer Costs for Employee Compensation, or ECEC, is published every

March. In recent years, the ECEC

has been growing at a slower rate

than the ECI. This study posits a

couple of explanations for the

divergent behavior of the two series.

The next section describes the

processes by which individual job

quotes are aggregated to obtain the

ECI and the ECEC. The following

sections then analyze the divergent

behavior of the two series. The

differing growth rates stem largely

from the fact that the ECI and the

ECEC are designed to measure

different things.

Procedures used to calculate

the ECI

There are two distinct steps in

calculating the ECI. The first is to

estimate the average (mean) compensation for each of approximately

700 categories of labor defined by

approximately 70 2-digit SIC

industries and 10 major occupations.

The second step is to aggregate the

cell means for the different types of

labor to obtain a single index

number. It is easier to start with a

discussion of the second step in the

process.

The ECI is intended to indicate

how the average compensation paid

by employers would have changed

over time if the industrial-occupational composition of employment

had not changed from the base

period. Consequently, the ECI is

calculated as a fixed weight, or

Laspeyres, index that controls for

employment shifts across 2-digit

industries and major occupations.

This index can be interpreted as the

weighted sum of the changes in

compensation costs for the various

categories of labor, where the

weighting factor for each category is

its share of total labor compensation

in the base period. From March

1986 to December 1994, the employment numbers used in the construction of the weights for the ECI were

obtained from the 1980 Census of

Population. From March 1995 on,

the employment numbers are from

the 1990 Occupational Employment

Statistics survey.

Now consider the first step in the

calculation of the ECI, namely, the

estimation of mean compensation for

each of the various categories of

labor. At first glance, it seems as

though this step should be straightforward. Without a costly census,

however, one cannot observe the

compensation received by all

workers of a given type. Thus,

calculating mean compensation of

the various categories of labor is at

least in part a problem of statistical

estimation. This estimation problem

is complicated by the fact that one

must estimate mean wages over a

number of periods and not just at a

point in time. This causes problems

because the ECI sample changes

over time. After a job is initially

surveyed, it is included in the ECI

sample for about 16 to 20 quarters.

At the end of this period, the job is

deleted from the sample and replaced by an incoming job. Some

jobs drop out of the sample even

sooner due to nonresponse.

The simplest way to estimate the

mean change in compensation for a

category of labor between period 0

(the base period) and period t (the

reference period) would be to

compare the average compensation

for that category in the reference

period with the average compensation for that category in the base

period. However, because the ECI

sample changes over time, this

would involve comparing averages

across jobs that may be dissimilar.

The ECI thus takes a different

approach. To start, the change in

compensation for a category of labor

between the base period 0 and period

1 is estimated as the ratio of the

average compensation for that

category’s jobs in period 1 to the

average compensation for that

category’s jobs in period 0. 1 To

ensure that this estimate is not

affected by a change in the composition of jobs, only jobs that are in the

sample in both period 0 and period 1

are used in the calculation. A

similar procedure is then used to

calculate the mean change in

compensation between period 1 and

period 2, between period 2 and

period 3, and so on. The proportionate change in mean compensation

from time 0 to t is then calculated as

the product of the individual per

period changes.2

Procedures used to calculate

the ECEC

As noted above, the ECEC is

designed to measure the average cost

of employee compensation. Accordingly, the ECEC is calculated by

multiplying each job quote by its

sample weight and then summing

across job quotes to estimate mean

compensation for each of the

categories of labor. The cell means

are then averaged using current

employment weights from the

Current Employment Survey (CES),

rather than the fixed employment

weights used by the ECI. 3

What matters for present purposes is not so much what the ECEC

tells about the level of average

compensation, but what it tells about

the changes in average compensation over time. Like the ECI, the

calculation of the change in the

ECEC between the base period 0 and

a reference period t involves two

steps. The first step estimates the

proportionate change in mean

compensation for each category of

labor as the ratio of the average
17 Compensation and Working Conditions Summer 1997

compensation for that category’s jobs

in period t to the average compensation for that category’s jobs in period

0. It is important to note that this

differs from the analogous step in

the ECI because it does not control

for the effect of a change in the

composition of jobs within a cell.

Step two involves taking a weighted

sum of the changes in compensation

costs for the various categories of

labor. Similar to step one, this step

differs from that in the ECI by not

controlling for employment shifts

across the different categories of

labor.

Comparing the ECI and the

ECEC

The published ECI and ECEC

estimates for wages, benefits, and

total compensation among private

industry workers are shown in table

1. The base quarter for the ECI

indexes is June 1989. From March

1987 to March 1996, the ECI wage

and benefit indexes increased by

35.2 and 54.9 percent, respectively.

In contrast, the ECEC estimates for

wages and benefits rose by 28.0 and

36.4 percent. In annual terms, the

ECI wage and benefit indexes grew

at average rates of 3.4 and 5.0

percent, while the ECEC estimates

for wages and benefits grew at

average rates of 2.8 and 3.5 percent.

Thus, the ECEC estimates have been

growing at a slower rate than the

ECI indexes, with the differential

growth rate being especially high for

benefits. Interestingly, while the

ECI wage and benefit indexes grew

at a faster rate than the corresponding ECEC estimates throughout the

entire period, the difference in

growth rates is especially large from

March 1994 to March 1995. From

March 1994 to March 1995, the ECI

wage and benefit indexes both grew

by 2.9 percent. In contrast, the

ECEC for wages rose by 0.9 percent

while the ECEC for benefits actually

fell by 1.8 percent. As discussed

above, the two steps in the calculation of the ECI and the ECEC

involve first combining all of

the jobs within a given cell to obtain

a cell average, and second, aggregating across the cell averages to obtain

the final index. Both steps are done

differently for the ECEC and the

ECI. To what extent is the divergent

behavior of the two indexes due to

the different ways of combining the

job quotes to obtain cell averages

and to what extent is it due to the

different ways of aggregating the

cell averages?

This question can be answered by

constructing a new index that is a

mixture of the ECI and the ECEC.

The first step in this construction is

to calculate cell means directly from

the current sample. This is identical

to the first step in the construction of

the ECEC. In contrast, the ECI

obtains mean compensation for each

cell by chaining together the

estimated proportionate quarter-toquarter changes in compensation

from the base period through the

current period. The second step

involves taking the weighted sum of

the compensation relatives for the

various categories of labor, where

the (Laspeyres) weight for each labor

category is the category’s share of

total labor compensation in the base

period. This calculation is identical

to the second step in the construction

of the ECI. In contrast, an index

equal to the change in the ECEC

implicitly uses a different weighting

scheme because it does not control

for employment shifts across the

different categories of labor.

For convenience, the new index

will be referred to as a Laspeyres

level index. Using this new index,

the ECI-ECEC differential can be

decomposed into two parts:

(1) ECI

t

 - ECECt/ECEC0 =

(ECI

t 

- Lt) + (Lt - ECECt/ECEC0)

where ECI

t 

denotes the value of the

ECI index in a reference period t,

ECECt/ECEC0 denotes the proportionate change in the ECEC between

the base period (period 0) and the

reference period t, and Lt denotes the

value of our new Laspeyres level

index in period t.

In interpreting (1), note that the

term ECI

t

 - Lt denotes that portion of

the ECI-ECEC differential stemming

from the different procedures to

obtain cell means. The term Lt -

ECECt/ECEC0 is that part of the

differential stemming from the

different ways of aggregating cell

means to obtain the final index.

The replicated ECI and ECEC

indexes from March 1986 through

March 1996 are shown in table 2.

Note that the rates of growth over

time in these indexes are quite

similar to the published indexes in

Table 1.4 Note also that, although an

ECEC is published only for March,

an ECEC index has been calculated

for all quarters.

Laspeyres level wage, benefit, and

total compensation indexes are

shown in table 3. To reiterate, the

first step in the creation of each

Laspeyres level index is to calculate

cell means directly from the current

sample, as is done with the ECEC

index. The second step is to use the

Laspeyres formula to aggregate the

estimated proportionate changes in

mean cell compensation.

Comparing columns 1 and 2 in

table 3 with columns and 1 and 2 in

table 2, one sees that the Laspeyres

level wage and benefit indexes have

both grown more slowly than the

corresponding ECI components.

Furthermore, a comparison of

columns 1 and 2 in table 3 with

columns and 4 and 5 in table 2

reveals that the Laspeyres level wage

and benefit indexes have both grown

at a faster rate than the corresponding ECEC indexes. Specifically,

while the replicated ECI and ECEC

wage indexes increase by 39.7 and

30.9 percent, respectively, from

March 1986 to March 1996, the

Laspeyres level wage index increases

by 36.2 percent. Over this period,

the increases in the ECI, ECEC, and

Laspeyres level benefit indexes are

59.3, 36.0, and 49.2 percent,

respectively.

The results above indicate that

about 40 percent of the difference

between the ECI and ECEC wage
 Compensation and Working Conditions Summer 1997 18

Table 1. Published ECI and ECEC indexes by quarter, 1986-96 (June 1989 = 100)

Total Total

Wage Benefit compen- Wage Benefit compensation sation

1986 I ............................................................................... 89.2 85.8 88.2

II ............................................................................... 89.9 86.1 88.9

 III ............................................................................... 90.6 87.0 89.5

 IV ............................................................................... 91.1 87.5 90.1

1987 I ............................................................................... 92.0 88.2 91.0 $9.83 $3.60 $13.42

II ............................................................................... 92.6 89.0 91.6

 III ............................................................................... 93.5 89.6 92.5

IV ............................................................................... 94.1 90.5 93.1

1988 I ............................................................................... 95.0 93.4 94.5 10.02 3.77 13.79

 II ............................................................................... 96.1 94.7 95.7

 III ............................................................................... 97.0 95.7 96.6

 IV ............................................................................... 98.0 96.7 97.6

1989 I ............................................................................... 99.0 98.4 98.8 10.38 3.90 14.28

 II ............................................................................... 100.0 100.0 100.0

 III ............................................................................... 101.2 101.4 101.2

 IV ............................................................................... 102.0 102.6 102.3

1990 I ............................................................................... 103.2 105.5 103.9 10.84 4.13 14.96

 II ............................................................................... 104.5 106.9 105.2

 III ............................................................................... 105.4 108.3 106.2

 IV ............................................................................... 106.1 109.4 107.0

1991 I ............................................................................... 107.3 111.6 108.5 11.14 4.27 15.40

 II ............................................................................... 108.4 113.5 109.8

 III ............................................................................... 109.3 115.2 111.0

 IV ............................................................................... 110.0 116.2 111.7

1992 I ............................................................................... 110.9 118.6 113.1 11.58 4.55 16.14

 II ............................................................................... 111.6 119.7 113.9

 III ............................................................................... 112.2 121.2 114.8

 IV ............................................................................... 112.9 122.2 115.6

1993 I ............................................................................... 113.9 125.2 117.1 11.90 4.80 16.70

 II ............................................................................... 114.6 126.7 118.0

 III ............................................................................... 115.7 127.7 119.1

 IV ............................................................................... 116.4 128.3 119.8

1994 I ............................................................................... 117.2 130.7 121.0 12.14 4.94 17.08

 II ............................................................................... 118.1 131.7 122.0

III ............................................................................... 119.1 132.8 123.0

IV ............................................................................... 119.7 133.0 123.5

1995 I ............................................................................... 120.6 134.5 124.5 12.25 4.85 17.10

 II ............................................................................... 121.5 135.1 125.4

 III ............................................................................... 122.4 135.6 126.2

 IV ............................................................................... 123.1 135.9 126.7

1996 I ............................................................................... 124.4 136.6 127.9 12.58 4.91 17.49

Published ECI Published ECEC

Quarter

indexes is due to their different

procedures for aggregating individual job quotes to obtain cell

means while about 60 percent is due

to their different ways of aggregating

over cell means. Similarly, about 43

percent of the difference between the

ECI and ECEC benefit indexes is

due to their different procedures for

aggregating individual job quotes to

obtain cell means while about 57

percent is due to their different ways

of aggregating over cell means.

Note, however, that these proportions have not been constant over

time. For example, as can be seen in

charts 1 and 2, the Laspeyres level

wage and benefit indexes track the

replicated ECI wage and benefit

indexes fairly closely until 1994.

This indicates that the different ways

of aggregating cell means account for

most of the ECI-ECEC differential

until 1994, with the different ways of

aggregating individual job quotes to

obtain cell means playing an important role only after March 1994.

As an additional check on these

results, consider an alternative

decomposition. Recall that the

Laspeyres level index calculates cell

means in the same manner as the

ECEC index, but aggregates across

cell means in the same manner as

the ECI. An index is now constructed that reverses this procedure.

Like the ECI, the first step in the

creation of our new alternative

index involves calculating current

period compensation for each cell by

chaining together the estimated

proportionate quarter-to-quarter

changes in compensation from the

base period through the current

period. The second step is to take the

weighted sum of the changes in

compensation costs for the various

categories of labor using the implicit

ECEC weights that do not control for

employment shifts across the different

categories of labor. Using this new

index, our decomposition of the ECIECEC differential takes the form:
19 Compensation and Working Conditions Summer 1997

Table 2. ECI and ECEC replicated indexes by quarter, 1986-96 (March 1986 = 100)

Total Total

Wage Benefit compen- Wage Benefit compensatiion sation

1986 I ............................................................................. 100.0 100.0 100.0 100.0 100.0 100.0

II ............................................................................. 100.9 100.5 100.8 100.9 100.5 100.8

 III ............................................................................. 101.6 101.4 101.6 102.6 102.7 102.6

 IV ............................................................................. 102.2 102.0 102.2 102.5 102.6 102.5

1987 I ............................................................................. 103.3 102.9 103.2 103.0 102.4 102.8

 II ............................................................................. 103.9 103.8 103.9 102.8 101.8 102.5

 III ............................................................................. 105.0 104.6 104.9 103.9 103.2 103.7

 IV ............................................................................. 105.7 105.6 105.7 104.6 103.5 104.3

1988 I ............................................................................. 106.7 108.9 107.3 103.1 103.9 103.3

 II ............................................................................. 107.9 110.5 108.6 104.0 104.4 104.1

 III ............................................................................. 108.9 111.6 109.6 104.9 104.9 104.9

IV ............................................................................. 109.9 112.8 110.7 105.8 105.8 105.8

1989 I ............................................................................. 111.2 114.8 112.1 106.8 108.0 107.1

 II ............................................................................. 112.2 116.6 113.4 107.0 108.6 107.4

III ............................................................................. 113.5 118.3 114.8 108.5 110.7 109.1

IV ............................................................................. 114.5 119.8 116.0 109.9 111.5 110.4

1990 I ............................................................................. 115.9 123.1 117.8 111.2 114.2 112.0

 II ............................................................................. 117.2 124.7 119.3 111.9 115.2 112.8

 III ............................................................................. 118.3 126.3 120.5 112.9 116.8 113.9

 IV ............................................................................. 119.0 127.6 121.3 113.4 117.5 114.5

1991 I ............................................................................. 120.4 130.2 123.0 114.8 118.6 115.8

 II ............................................................................. 121.6 132.3 124.5 115.4 119.9 116.6

III ............................................................................. 122.6 134.2 125.7 117.0 122.3 118.4

 IV ............................................................................. 123.4 135.4 126.6 117.7 123.0 119.1

1992 I ............................................................................. 124.4 138.2 128.1 118.6 125.4 120.5

 II ............................................................................. 125.2 139.4 129.0 118.8 125.7 120.7

 III ............................................................................. 125.9 141.3 130.1 119.0 126.8 121.1

IV ............................................................................. 126.7 142.5 130.9 120.4 128.2 122.5

1993 I ............................................................................. 127.8 145.9 132.7 121.8 131.7 124.5

II ............................................................................. 128.7 147.7 133.8 122.0 132.4 124.8

III ............................................................................. 129.8 148.9 135.0 122.6 133.3 125.5

 IV ............................................................................. 130.7 149.6 135.8 123.8 133.7 126.5

1994 I ............................................................................. 131.5 152.2 137.1 124.6 135.6 127.6

 II ............................................................................. 132.6 153.4 138.1 123.7 131.9 125.9

III ............................................................................. 133.7 154.8 139.3 124.8 132.7 127.0

 IV ............................................................................. 134.3 155.0 139.9 125.2 131.9 127.0

1995 I ............................................................................. 135.4 156.8 141.1 126.2 133.2 128.1

II ............................................................................. 136.6 157.4 142.2 126.2 134.2 128.4

 III ............................................................................. 137.5 158.0 143.0 128.2 134.5 129.9

 IV ............................................................................. 138.3 158.4 143.7 129.5 136.0 131.3

1996 I ............................................................................. 139.7 159.3 145.0 130.9 136.0 132.3

ECI ECEC

Quarter

(2) ECI

t 

- ECECt/ECEC0 =

(ECI

t

 - I

t

) + (I

t

 - ECECt/ECEC0),

where I

t 

denotes the value of the new

index in the reference period t. The

new index, which will be referred to

as the chained mean ECEC, is

presented in table 4. The first

column in table 4 shows that the

chained mean ECEC wage index

increased by 36.5 percent between

March 1986 and March 1996. As

noted above, the ECI and ECEC

wage indexes increased by 39.7 and

30.9 percent, respectively. Thus,

according to the new decomposition,

about 65 percent of the difference in

the ECI and ECEC wage growth

rates is due to differences in the way

that job quotes are aggregated to the

cell means. The remaining 35

percent is due to differences in the

way that cell means are aggregated.

The chained mean ECEC benefit

cost index increased by 51.6 percent

between March 1986 and March

1996, so the new decomposition

indicates that about 33 percent of the

difference in the ECI and ECEC

benefit growth rates is due to

differences in the way that cell

means are aggregated. About 67

percent is due to differences in the

way that job quotes are aggregated to

cell means.

To summarize, the two decompositions yield differing estimates of

the proportion of the ECI-ECEC

differential accounted for by the two

different stages in the aggregation

process. Furthermore, as can be

seen from charts 1 and 2, these

proportions vary significantly over

time. Consequently, while it is

difficult to pin down the exact

proportion of the ECI-ECEC

differential that is due to each stage,

the two decompositions demonstrate

that differences in both stages of the

aggregation process are at times

important causes of the differential

between the ECI and ECEC growth

rates. Each accounts for at least

one-third of the ECI-ECEC growth
 Compensation and Working Conditions Summer 1997 20

TOTAL

BENEFITS

Wages

 and

 salaries

Chart 1. ECI-ECEC decomposition for wage and salaries by quarters, 1986-96

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

100

110

120

130

140

ECI Replicated Laspeyres Levels ECEC Replicated Chain Mean ECEC

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

90

100

110

120

130

140

150

160

170

ECI Replicated Laspeyres Levels ECEC Replicated Chain Mean ECEC

Chart 2. ECI-ECEC decomposition for total benefits by quarter, 1986-96
21 Compensation and Working Conditions Summer 1997

Table 3. Laspeyres levels indexes by quarter, 1986-96 (March 1986 = 100)

Wage Benefit Total compensation

1986 I ......................................................................... 100.0 100.0 100.0

II ......................................................................... 100.9 100.5 100.8

 III ......................................................................... 102.6 102.2 102.6

 IV ......................................................................... 103.1 102.9 103.0

1987 I ......................................................................... 103.8 103.2 103.6

 II ......................................................................... 104.0 103.3 103.8

 III ......................................................................... 104.6 104.5 104.6

 IV ......................................................................... 105.3 105.0 105.2

1988 I ......................................................................... 106.3 108.5 106.9

II ......................................................................... 107.7 109.9 108.4

 III ......................................................................... 108.2 110.1 108.8

IV ......................................................................... 109.8 111.8 110.3

1989 I ......................................................................... 110.8 113.6 111.6

 II ......................................................................... 111.8 115.2 112.7

III ......................................................................... 112.7 116.8 113.9

 IV ......................................................................... 113.9 116.8 114.7

1990 I ......................................................................... 115.8 120.1 117.0

 II ......................................................................... 117.4 122.3 118.7

 III ......................................................................... 117.8 123.4 119.3

 IV ......................................................................... 118.2 124.6 119.9

1991 I ......................................................................... 120.2 126.7 121.9

 II ......................................................................... 121.4 128.5 123.4

 III ......................................................................... 123.0 131.8 125.4

 IV ......................................................................... 123.5 132.3 125.9

1992 I ......................................................................... 124.8 135.6 127.7

 II ......................................................................... 125.8 136.9 128.9

 III ......................................................................... 125.9 137.6 129.2

IV ......................................................................... 127.1 139.9 130.6

1993 I ......................................................................... 128.4 143.8 132.7

 II ......................................................................... 129.4 145.6 134.0

 III ......................................................................... 130.8 146.5 135.3

 IV ......................................................................... 132.1 147.3 136.3

1994 I ......................................................................... 132.8 149.7 137.5

 II ......................................................................... 131.8 145.6 135.6

 III ......................................................................... 131.7 146.0 135.7

 IV ......................................................................... 132.1 145.9 135.9

1995 I ......................................................................... 133.1 147.6 137.2

 II ......................................................................... 133.8 149.7 138.2

 III ......................................................................... 135.2 149.2 139.2

IV ......................................................................... 135.4 149.9 139.6

1996 I ......................................................................... 136.2 149.2 140.0

Quarter

differential between March 1986 and

March 1996.

Shifts toward lower paying jobs

among cells and within cells

The decompositions above

indicate that a substantial part of the

difference between the ECI and

ECEC growth rates is due to the

differences in the second stage of

aggregation, that is, in the aggregation over the cell averages to obtain

the final index. How can one

interpret this finding?

The fact that the Laspeyres level

wage and benefit indexes in table 3

have grown faster than the replicated

ECEC indexes in table 2 indicates

that employment has shifted toward

those industry/major occupation cells

where wages and, especially, benefits

are lower. Additional evidence for

this is provided by the fact that the

ECI wage and benefit indexes have

grown faster than the chained mean

ECEC indexes in table 4.

A similar pattern persists when

the distribution of employment

within the industry/major occupation

cells is examined. Specifically, the

finding that the ECI wage and

benefit indexes have been growing

faster than the Laspeyres level wage

and benefit indexes indicates that, on

average, employment within the ECI

cells is becoming more concentrated

in jobs that offer lower compensation. Further evidence of this is

provided by the fact that the chained

mean ECEC indexes have been

growing faster than the replicated

ECEC indexes. The effect of this

shift toward lower paying jobs is

chained out of the ECI wage and

benefit indexes but not the ECEC

indexes. Interestingly, the decomposition using the chained mean ECEC

yields a higher estimate of the share

of the ECI-ECEC differential that is

due to differences in the way that job

quotes are aggregated to the cell

means than does the decomposition

using the Laspeyres levels index.

This suggests that the within-cell

shift toward lower paying jobs is

most important for those cells with

the greatest employment growth.

This appears to mirror the shifts that

are occurring across cells.

It is important to realize that the
 Compensation and Working Conditions Summer 1997 22

Table 4. Chained mean ECEC by quarter, 1986-96 (March 1986 = 100)

Wage Benefit Total Compensation

1986 I ........................................................................ 100.0 100.0 100.0

 II ........................................................................ 100.9 100.5 100.8

 III ........................................................................ 102.1 102.0 102.0

 IV ........................................................................ 102.3 102.2 102.3

1987 I ........................................................................ 103.2 103.2 103.2

 II ........................................................................ 103.4 103.2 103.3

 III ........................................................................ 104.7 104.1 104.5

 IV ........................................................................ 105.6 105.1 105.5

1988 I ........................................................................ 104.2 105.7 104.6

 II ........................................................................ 104.9 106.6 105.3

III ........................................................................ 106.2 107.9 106.7

 IV ........................................................................ 106.7 108.8 107.3

1989 I ........................................................................ 107.7 110.7 108.5

 II ........................................................................ 108.5 112.5 109.6

 III ........................................................................ 110.2 114.6 111.3

 IV ........................................................................ 111.2 115.9 112.4

1990 I ........................................................................ 112.7 119.2 114.4

 II ........................................................................ 113.3 120.1 115.0

 III ........................................................................ 114.5 121.9 116.4

 IV ........................................................................ 115.1 122.7 117.1

1991 I ........................................................................ 116.6 125.6 118.9

 II ........................................................................ 117.2 126.9 119.8

 III ........................................................................ 118.5 129.1 121.3

 IV ........................................................................ 119.0 130.1 121.9

1992 I ........................................................................ 120.0 132.6 123.2

 II ........................................................................ 120.0 133.1 123.4

III ........................................................................ 120.9 134.9 124.5

 IV ........................................................................ 122.0 136.0 125.6

1993 I ........................................................................ 123.0 139.0 127.1

 II ........................................................................ 123.3 139.7 127.5

III ........................................................................ 124.3 140.9 128.6

IV ........................................................................ 125.6 142.0 129.9

1994 I ........................................................................ 126.7 144.7 131.4

 II ........................................................................ 127.4 144.7 131.9

 III ........................................................................ 129.2 146.4 133.6

 IV ........................................................................ 130.0 146.5 134.3

1995 I ........................................................................ 131.0 148.0 135.4

 II ........................................................................ 131.3 147.8 135.6

III ........................................................................ 132.8 149.1 137.0

 IV ........................................................................ 134.4 150.0 138.4

1996 I ........................................................................ 136.5 151.6 140.4

Quarter

ECI and ECEC have different

interpretations. The ECI is a

Laspeyres index that is intended to

indicate the average percentage

change in compensation, controlling

for shifts in the distribution of

employment across cells. Similarly,

the ECI’s procedure for measuring

changes in the mean compensation

for an individual cell has the effect

of controlling for shifts in the

distribution of employment across

jobs within a cell. The ECEC, on the

other hand, does not control for

shifts in the distribution of employment across cells. Nor does it

control for shifts in the distribution

of employment across jobs within a

cell.

The foregoing does not mean that

it is inappropriate to use the ECEC

to measure changes in compensation

over time. Rather it means that a

change in the ECEC conveys

different information than does a

change in the ECI. The change in

the ECEC from one year to the next

indicates the change in workers’

average compensation. Average

compensation will change for one of

two reasons. First, it will change if

compensation in the “representative”

job is changing. Second, it will

change if shifts in the distribution of

employment lead to changes in the

representative job.

Sample replacement in the ECI

A recent study examines the shift

toward lower paying jobs in more

detail.5 The ECI sample changes

gradually over time, with approximately 5 percent of the job quotes

being replaced each quarter. The

study compares the wages and

benefits associated with incoming

jobs with the wages and benefits

associated with the jobs they replace.

The results indicate that controlling

for 2-digit industry and major

occupation, the wages and benefits
23 Compensation and Working Conditions Summer 1997

associated with incoming ECI jobs

are lower on average than the wages

and benefits associated with outgoing jobs. Specifically, the wage

associated with an incoming ECI job

is, on average, about 3.1 percent

lower than the wage associated with

an outgoing job. And the benefit

cost associated with an incoming

ECI job is, on average, about 7.4

percent lower than the benefit cost

associated with an outgoing job. A

significant portion of this differential

can be explained by observed

differences in such characteristics as

establishment size, union status, and

part-time status. After controlling

for these characteristics, the average

differential between the wages

associated with outgoing and

incoming jobs falls to 1.3 percent

and the average differential between

the benefits associated with outgoing

and incoming jobs falls to 3.7

percent.

As discussed above, the lower

compensation in incoming jobs in

good part appears to reflect the

evolution of the labor market.

However, nonrandom attrition could

conceivably also be a factor contributing to the lower compensation in

incoming jobs. The paper, “Sample

Replacement in the ECI,” shows that

attrition is higher for nonunion jobs

and jobs from smaller establishments. It is well known that such

establishments tend to offer lower

wages. Indeed, jobs that drop out of

the ECI sample prematurely offer

lower benefits than jobs that do not.

Surprisingly, however, jobs that drop

out prematurely do not seem to offer

lower wages. Furthermore, adjusting the sample weights for incoming

job quotes in an attempt to age them

artificially to the average age of

outgoing job quotes eliminates only

a small portion of the difference in

expected compensation between

incoming and outgoing jobs. This

suggests that the nonrandom

attrition in the ECI sample does not

have much of an effect on the ECEC

level estimates. Of course, even if

nonrandom attrition has a relatively

minor effect on the ECEC level

estimates, it may still affect the ECI

if compensation growth for jobs that

drop out prematurely differs from

that for jobs that do not. However,

this does not seem very likely.

Finally, even if nonrandom

sample attrition does not affect

growth rates in the ECI and ECEC,

there is still an important sampling

issue that should be addressed. If

the evolution of the labor market is

in fact the primary cause of the

lower compensation in incoming

jobs, then there arises the concern

that the ECI-ECEC sample is being

replenished too slowly to represent

the current labor market adequately.

Since incoming jobs tend to offer

lower wages than outgoing jobs and

since slow replacement of the ECIECEC sample means that outgoing

jobs are over represented at any

point in time, the ECEC will

overstate average compensation in

the labor market. The effect of slow

replacements on the ECI will depend

on whether compensation growth is

higher or lower in incoming jobs.

This is something we plan to

investigate in the future.

—ENDNOTES—

1

 The ECI sample weights indicate exactly how

much weight should be given to each job quote.

Once a job is surveyed, its sample weight is held

fixed during the entire time that it remains in the

sample. As a consequence, the sample weights in

period t will not strictly reflect current employment in period t. However, the importance of this

consideration is limited by the fact that somewhere

between 20 and 25 percent of the sample is replaced every year.

2

 See Wood, G. Donald, “Estimation Procedures for the Employment Cost Index,” Monthly

Labor Review, May 1982, pp. 40-42.

3

 For a more precise (mathematical) statement

of the difference between the ECI and the change

in the ECEC, see Lettau, Michael K., Mark A.

Loewenstein, and Aaron T. Cushner, “Explaining

the Differential Growth Rates of the ECI and the

ECEC,” Compensation Research and Program

Development Group Working Paper, 1996. One

 practical complication in computing the ECEC

should be noted. Unlike the ECI with fixed

weights, calculating the ECEC requires employment counts for every category of labor in every

period t. While quarterly industry employment

counts can be obtained from the CES, occupational

employment counts cannot. Consequently, employment counts for the various ECI-ECEC cells

are obtained by combining the quarterly industry

employment counts with the sample weights. (We

plan to study further the effect of using the occupational distribution within industries from the

ECI sample to calculate the current employment

counts.) For a more detailed description of this process, see Lettau, Michael K., Mark A.

Loewenstein, and Aaron T. Cushner, “Is the ECI

Sensitive to the Method of Aggregation?”, Compensation Research and Program Development

Group Working Paper, 1996. We are thankful to

Albert E. Schwenk for deriving the employment

estimates.

4 The reproduced indexes differ slightly from

the official indexes for three reasons. First, the ECI

cell definitions have undergone some minor changes

over time, so a few cells were aggregated when

necessary to obtain consistency over time. Second,

the official ECI procedure for imputing averages

for cells with a small number of job quotes differs

slightly from the official ECEC procedure. The official ECI procedure is used for the replication of

both the ECEC and the ECI. Finally, for the initial

quarter, March 1986, the replicated indexes use the

sample of job quotes that are matched to quotes in

June 1986 rather than December 1985.

5

 See Lettau, Michael K. and Mark A.

Loewenstein, “Sample Replacement in the ECI,”

Compensation Research and Program Development Group Working Paper, 1996.