28 Monthly Labor Review April 2006

Introducing 2002 Weights Introducing 2002 Weights

Introducing 2002 weights

for the Employment Cost Index

Beginning in March 2006, ECI estimates were modified

to reflect 2002 employment counts; disruptions

to the most-aggregated historical series from this

change alone were slight

Stephanie L. Costo is

an economist in the

Office of

Compensation and

Working Conditions,

Bureau of Labor

Statistics. E-mail:

costo.stephanie@bls.gov

Stephanie L. Costo The Employment Cost Index (ECI), an

employment-cost-weighted Laspeyres

index,1 is a measure of the change in the

cost of employing a fixed set of labor inputs.2

Most Laspeyres indexes update their fixed

weights periodically, and the ECI is no exception. In March 2006, the ECI introduced 2002

fixed employment weights to replace the 1990

weights used from 1995 through 2005.3 The new

weights are based primarily on data from the

BLS Occupational Employment Statistics (OES)

survey.4

In addition to using new employment weights,

the ECI changed in several other ways. One dramatic change was the conversion to the 2002

North American Industry Classification System

(NAICS) and the 2000 Standard Occupational

Classification (SOC) system in order to classify,

respectively, industries and occupations. Other

changes to the ECI in March 2006 included new

imputation methods and the introduction of new

series. These changes affected the historical continuity between the old and new indexes, as well

as our ability to measure the impact of the new

weights.5

This article examines the reweighting of the

ECI and discusses its effects.

Introducing new weights into the ECI

Fixed weights in the ECI. Weights are used to

derive population estimates from the survey sample. With regard to the ECI, data from the sample

are multiplied by the appropriate weights in order

to obtain unbiased estimates for U.S. civilian,

State and local government, and private-industry

workers.

Two sets of weights are used in the ECI: sample

weights and fixed weights. Sample weights are

assigned to each establishment-occupation pair

in the ECI sample and reflect the probability of

selection of the establishment and the occupation within the establishment. The sample

weights are used to calculate current- and previous-quarter average hourly compensation costs

for broad industry and occupation groups within

private industry and State and local governments. These groups are known as estimation

cells.

The average hourly compensation costs for

each estimation cell are then multiplied by the

second set of weights, a measure of base-period

employment costs in the cell. The base-period

costs are the product of 2002 employment in the

estimation cell and the December 2005 average

wage and total benefit cost in the cell. These fixed

weights are what make the ECI a Laspeyres index,

defined by the fact that the relative importance of

each estimation cell does not change.

Since the inception of the ECI in 1975, its

industry structure was based on the Standard

Industrial Classification (SIC) system, as defined

by the U.S. Office of Management and Budget.

For the ECI, most industry categories for private

industry were specified at the two-digit SIC level;

examples are textile manufacturing and personal
Monthly Labor Review April 2006 29

services. For State and local governments, the industry

categories varied from specific three-digit SIC’s, such as

elementary and secondary schools, to broader industry

divisions, such as public administration. With the switch to

NAICS in March 2006, the same general approach was used,

except that, under the NAICS structure, three-digit codes

generally correspond to SIC two-digit codes.

Until March 2006, the occupation categories for the ECI

were based on the structure developed for the 1990 Census

of Population. The scope of the ECI was restricted to more

than 400 jobs in 10 major groups. With the switch to the SOC,

about 800 occupations are defined within 9 aggregate occupational groups.6

A sampling procedure is used in each establishment to

select a set of jobs. Then, wage and benefit information pertaining to the selected jobs is collected in the initial visit to

the establishment and is updated each quarter. The fixed

employment weights, however, apply to the occupational category that the specific jobs represent.

For example, in a particular industry, data might be collected from 20 establishments, in each of which a set of

occupations will be selected on a probability basis. In one

establishment, the field economist might select industrial

engineers, secretaries, and janitors. In another establishment

in the industry, the field economist might select architects,

order clerks, and cooks. The engineers and architects would

be included in the professional and related occupations

category, the secretaries and order clerks in the office and

administrative support occupations category, and the janitors

and cooks in the service occupations category. The fixed

employment weights would be applied to these broader

categories.

Reasons for reweighting. ECI measures are used in essentially three different types of analysis:

• Measurement of the total change in labor cost from

the base period, December 2005, to any subsequent

period;

• Comparisons of changes in labor costs over

different subperiods (for example, comparison of

the change between December 2005 and December

2006 with that between December 2003 and

December 2004);

• Measurement of the current rate of increase in labor

costs.

No single index can be ideal for all three types of analysis.

For instance, an index that is appropriate for analyzing longrun changes will not be the best for measuring the current

rate of labor cost increases, and vice versa.

If the ECI were used only to measure the longrun change in

labor costs, the weights would seldom need to be updated.

Similarly, the value of the ECI in comparing changes in labor

costs over different subperiods depends on holding the

weights fixed for extended periods. The unchanging weights

are necessary in these cases to ensure that the same set of

labor inputs is being priced over time.

In contrast, if the ECI is to be used to measure the recent

rate of labor cost increases, the weights should be as current

as possible. With current weights, the index of labor cost

would measure the change between December 2004 and

March 2005 in the cost of purchasing the set of labor inputs

employed in December 2004. The index with current weights

differs from the existing ECI Laspeyres index, which would

estimate current labor cost increases as the change between

December 2004 and March 2005 in the cost of purchasing the

set of labor inputs employed at the reference point of the

1990 Occupational Employment Statistics (OES) survey. In

general, the accuracy of a Laspeyres index as a measure of

current labor cost change varies inversely with the magnitude

of shifts in employment among industries and occupations

since the reference period of the employment counts.

If the ECI’s employment weights were changed every

quarter to improve the measurement of current rates of labor

cost increases, it would be possible to derive a type of

Laspeyres index by multiplying together quarter-to-quarter

changes (expressed as ratios). Such a “chain” index would

provide a better estimate of the rate of labor cost increase for

each quarter than the current ECI does. The chain index would

not, however, provide the change in the cost of a fixed set of

workers for periods longer than one quarter, and changes for

different subperiods would not be for the same set of labor

inputs.

The ECI is a compromise between a pure Laspeyres index

and an index that uses new weights each quarter; that is, the

ECI’s weights are changed periodically after remaining fixed

for a number of years. Because the ECI’s employment weights

remain fixed for long periods, the possibility arises that the

index could lose its value as a measure of current change.

Fortunately, a number of price index studies have shown

that the period-to-period change in a fixed-weight Laspeyres

index is relatively insensitive to the weights used when the

weights vary within the range common to many economic

variables. Thus, the quarter-to-quarter changes calculated

with a Laspeyres index are apt to be quite close to the quarterto-quarter changes obtained by using the previous quarter’s

employment weights.7

For this reason, the ECI has employed one set of weights

for a number of years. This approach preserves the analytical

value of the Laspeyres index as a measure of change in labor

costs over the longrun and over different subperiods.

As the weights become older, however, the danger grows
30 Monthly Labor Review April 2006

Introducing 2002 Weights

that current rates of change using the fixed weights could

differ from those based on more recent weights by an amount

great enough to be important in economic analysis. To ensure

that the ECI will continue to provide a good approximation of

the current rate of labor cost increase, more recent weights

were introduced.

Consequences of reweighting

The new weights alter what the ECI is measuring when comparisons are made between estimates based on different sets

of employment weights. That is, any change calculated by

dividing an ECI index number based on new weights by an

index number using earlier weights is not a proper Laspeyres

estimate. Reweighting improves the currency of the index,

but disrupts historical continuity.

For example, between any two periods before March 2006,

when 1990 weights were used, the relative difference in the

index would be the change in the cost of employing the 1990

workforce. Between any two periods after March 2006, the

relative difference would be the change in the cost of employing the 2002 workforce. However, the ratio of an index for

a period after March 2006 to one for a period before March

2006 cannot be interpreted in terms of the cost of employing

any fixed workforce; that is, the ratio is not a Laspeyres index

number.

In the past, when new weights were introduced into the ECI,

all series were treated as continuous because there was little

change in the overall structure of the industry and occupation.

Unlike previous reweightings, however, the switch to NAICS–SOC

resulted in much more substantial changes to the classification

of industry and occupation. Fehmida Sleemi discusses these

changes in greater detail in her article in this issue and gives

guidance to users as to which series should be viewed as

continuous.8 Part of her analysis is based on a comparison of

previously published series with the NAICS–SOC series.

Subindexes. The impact of reweighting on each ECI subindex, considered separately, is the same as that on the aggregate index. The reweighting caused the change in cost for

the subindex to be closer to the change in current cost, but it

also resulted in a disruption of the subindex as a measure of

longrun change and of change between periods before and

periods after the new weights were introduced. An additional

issue was raised, however, when the reweighted subindexes

were introduced. This issue concerned the relationship between the change in the aggregate index and the changes in

the component subindexes.

The aggregate Laspeyres index can be expressed as a

weighted sum of any set of exhaustive and mutually exclusive

Laspeyres subindexes where the weights sum to unity. This

is a very desirable property, for two reasons. First, it guarantees that the change in the aggregate index falls within the

range of changes in the subseries; the change in the aggregate index cannot be greater than the largest change among

the subindexes or less than the smallest. Second, the property

also makes it possible to assign the increase in the aggregate

index to the subseries; that is, one can determine how much

of the change in the aggregate is attributable to the change in

each subseries.

For comparisons spanning the date on which the new

weights were introduced, however, the property that the

aggregate Laspeyres index can be expressed as the weighted

sum of any set of exhaustive and mutually exclusive subindexes was lost. For example, the change in the aggregate

index between September 2005 and September 2006 might be

larger or smaller than the change in any of the subindexes.

Effect of NAICS–SOC conversion on industry and occupation

employment weights. The switch to NAICS–SOC changed

the set of industries and occupations defined for the ECI.

In some cases, only the names changed. However, even

when an industry or an occupational category has the

same name as it had under the Standard Industrial Classification-Occupational Classification System (SIC–OCS), it may

be defined differently. Table 1 shows differences in employment due to definitional changes, for selected occupational

Table 1. Percent distribution of employment within the scope of

the Employment Cost Index in private industry, by selected

occupational and industry category, 1990 and 2002

1990 2002

 Occupational or industry category (under (under

SIC–OCS) NAICS–SOC)

 

All workers ................................................... 100 100

 

 Occupational category 

White-collar workers .................................... 55.1 53.8

Professional and related .......................... 12.5 14.0

Management, business, and financial ..... 10.5 9.3

Sales and related ..................................... 13.1 12.6

Office and administrative support ........... 19.0 17.9

Blue-collar .................................................... 29.8 27.9

Construction, extraction, farm, fishing,

and forestry .......................................... — 5.3

Installation, maintenance, and repair ...... — 4.4

Production ................................................ — 10.1

Transportation and material moving ......... — 8.1

Service ......................................................... 15.2 18.3

 

 Industry category 

Goods-producing industries ......................... 27.5 21.2

Mining ....................................................... .8 .5

Construction ............................................. 5.6 6.3

Manufacturing ........................................... 21.1 14.4

Service providing ......................................... 72.5 78.8

Transportation and public utilities ............ 6.4 4.4

Wholesale trade ........................................ 6.8 5.3

Retail trade ............................................... 21.6 14.3

Financial activities .................................... 7.4 7.3

NOTE: Employment data are not available by NAICS–SOC classification.

Dash indicates categories did not exist under SIC–OCS.
Monthly Labor Review April 2006 31

and industry categories.9 The effect of the conversion cannot

always be isolated from the impact of the new weights. Two

examples are illustrative.

For the manufacturing series, the conversion from SIC to

NAICS increased the impact of the reweighting. Generally,

manufacturing represents highly compensated jobs in the

goods-producing industries and the private sector. Employment in manufacturing (as defined in SIC) declined by about

13 percent during the period between the use of the old and

the use of the new weights (from 19.1 million in 1990 to 16.7

million in 2002). With the switch to NAICS, employment in

manufacturing declined even further, to 15.3 million in 2002,

due in part to a movement of printing and publishing out of

manufacturing and into the information industry. (Compensation in printing and publishing is about average for

manufacturing, so the shift of that industry out of manufacturing did not have much of an impact on average wages

in manufacturing.) Therefore, what would have been a 13-

percent reduction in employment from 1990 to 2002 effected

by introducing the new weights alone was magnified to nearly

20 percent by the switch to NAICS.

In contrast, the conversion from SIC to NAICS reduced the

effect of the reweighting for the retail trade series. After the

conversion, employment in retail trade showed a decline,

even though it increased from 19.4 million in 1990 to 23.3

million in 2002 under SIC. The explanation for this difference is

that the employment growth in SIC-defined retail trade was

more than offset by the movement under NAICS of about 8.1

million workers employed in eating and drinking places (now

food services and drinking places) out of retail trade and into

accommodation and food services.

Sources of new weights

The primary sources of the new weights were the BLS OES

survey10 and Longitudinal Data Base (LDB). The OES survey is

a periodic mail survey of 1.2 million nonfarm establishments

over a 3-year cycle. The survey collects occupational employment data on workers by industry and represents the entire

U.S. economy. The Bureau provides the procedures and

technical assistance for conducting the survey; State employment agencies collect the data. The LDB includes every

Table 2. Index levels and percent changes in compensation costs for civilian workers, 1990 and 2002 weights

[December 2000 = 100]

Based on 1990 weights (under SIC–OCS) Based on 2002 weights (under NAICS–SOC)

Index level 3-month change 12-month change Index level 3-month change 12-month change

December 2000 ............... 100.0 ... ... 100.0 ... ...

 2001

March ............................... 101.2 1.2 ... 101.3 1.3 ...

June ................................ 102.0 .8 ... 102.3 1.0 ...

September ....................... 103.2 1.2 ... 103.5 1.2 ...

December ........................ 104.1 .9 4.1 104.2 .7 4.2

 2002

March ............................... 105.1 1.0 3.9 105.1 .9 3.8

June ................................ 106.1 1.0 4.0 106.1 1.0 3.7

September ....................... 107.1 .9 3.8 107.1 .9 3.5

December ........................ 107.7 .6 3.5 107.7 .6 3.4

 2003

March ............................... 109.2 1.4 3.9 109.1 1.3 3.8

June ................................ 110.0 .7 3.7 110.0 .8 3.7

September ....................... 111.2 1.1 3.8 111.2 1.1 3.8

December ........................ 111.8 .5 3.8 111.8 .5 3.8

 2004

March ............................... 113.3 1.3 3.8 113.2 1.3 3.8

June ................................ 114.4 1.0 4.0 114.2 .9 3.8

September ....................... 115.4 .9 3.8 115.4 1.1 3.8

December ........................ 115.9 .4 3.7 116.0 .5 3.8

 2005

March ............................... 117.2 1.1 3.4 117.2 1.0 3.5

June ................................ 117.9 .6 3.1 117.9 .6 3.2

September ....................... 119.0 .9 3.1 118.9 .8 3.0

December ........................ 119.6 .5 3.2 119.6 .6 3.1

Quarter ending—
32 Monthly Labor Review April 2006

Introducing 2002 Weights

establishment paying unemployment insurance in the U.S.

economy, but does not provide information on occupational

employment.

To compute the ECI’s fixed employment weights, employment

by industry was determined from the LDB for all of the industries

within the scope of the ECI. Then, with the use of OES data, LDB

industry employment was apportioned among the major

occupational groups. In those industries excluded from the

LDB—primarily railroads—unadjusted OES employment data were

used. Except for railroads, industry employment from the OES

survey was similar to that from the LDB; generally, LDB employment was used to determine industry employment in order to be

consistent with cases in which the OES survey did not provide

employment figures at the required level of industry or sector

(private, State, or local) detail.

A major gap in the OES survey for purposes of computing

ECI weights was that, for hospitals and educational services,

employment data were not available separately by sector.

Also, apart from hospitals and education, all other employment in State governments and in local governments was

lumped together. To fill these gaps, LDB data were used to

calculate employment counts by industry, by sector (private,

State, or local), and then these counts were apportioned among

occupational categories, again with the use of the OES data.

Once the employment counts by occupation within

industry were determined, data from the 2000 Census of

Population were used as a broad check on the calculated

employment distributions (although confidence in those data

is limited because the industry and occupational classification is done by a member of each household). ECI data by

industry and occupation provided the final check on the

estimates.

Testing the effects of the new weights

As noted earlier, because of the many changes that were

made to the ECI survey at the time the new weights were

introduced, it was difficult to measure the separate impact of

the change in weights. To evaluate the impact on the ECI of

using 2002 weights in place of those for 1990, a test was

conducted estimating rates of change for 2001–05. The test

used 2002 employment weights applied to data generated by

the old method of imputation and compared the results with

the published figures based on the 1990 weights.

The test results show that, at the highest levels of aggregation—civilian workers—rates of change in compensation

costs for 2001–05 vary only slightly when 2002 weights and

NAICS–SOC definitions, rather than 1990 weights, are used. For

example, on the basis of 2002 weights, the estimated change

in compensation costs over the 5-year period ending December 2005 (19.6 percent) is the same as the change derived with

1990 weights. (See table 2.) The 3-month changes never differ

by more than three-tenths of a percentage point over the

entire December 2000–June 2005 period.11 

Notes

1

 A Laspeyres index is an index that measures the change in some

aspect of a group of items over time, using weights based on values in

a specific base year. Because the weights are constant from year to

year, a whole run of index numbers can be compared with one another.

2

 For a more detailed discussion of the Employment Cost Index and

its uses, see John W. Ruser, “The Employment Cost Index: what is it?”

Monthly Labor Review, September 2001, pp. 3–16; and Handbook of

Methods (Bureau of Labor Statistics, April 1997), on the Internet at

www.bls.gov/opub/hom (last updated April 2003), Chapter 8.

3

 Much of this article is based on two earlier ones discussing the

shifts from the 1970-to-80 and 1980-to-90 employment weights.

(See Albert E. Schwenk, “Introducing new weights for the Employment

Cost Index,” Monthly Labor Review, June 1985, pp. 22–27, and

“Introducing 1990 Weights for the Employment Cost Index,”

Compensation and Working Conditions, June 1995, pp. 1–5.)

4

 For more information on the OES survey, visit www.bls.gov/oes/

home.htm on the Internet.

5

 All of these changes are discussed in more detail in other articles

in this issue.

6

 For the 1990 ECI reweighting, professional and technical workers

were treated as separate occupation groups. The SOC structure, by contrast, combines the two groups.

7

 Schwenk, “Introducing new weights,” p. 4, compared ECI indexes

and changes obtained by using 1980 weights with those obtained by

using 1990 weights and found little difference between the two sets of

weights. For further analysis of the sensitivity of the ECI, see Michael

K. Lettau, Mark A. Loewenstein, and Steve P. Paben, “Is the ECI

insensitive to the method of aggregation? An update,” Monthly Labor

Review, December 2002, pp. 23–28.

8

 Fehmida Sleemi, “ECI conversion to NAICS and SOC codes,” this

issue, pp. 00–00.

9

 Employment data are not available by NAICS-SOC classification

before 2002.

10 The 1970 and 1980 fixed weights for the ECI were derived from

the censuses for those years. For the 1990 reweighting, the primary

data source was the OES survey.

11 December 2000 was used as the index base in this test because it

was necessary to do the analysis before December 2005 data became

available.