Compensation and Working Conditions Fall 1999 13

Compensation Cost Trends

ALBERT E. SCHWENK

Compensation Cost

Trends in Private

Industry and State and

Local Governments

The Employment Cost Index

(ECI) is a fixed-employmentweighted index that tracks

quarterly changes in labor costs (wages

and salaries, and employer costs for

employee benefits), free from the influence of employment shifts among

occupations and industries. It is the

only measure of compensation cost and

wage and salary changes available for

both private industry and State and

local governments. Therefore, it

uniquely permits comparisons of

trends in compensation costs and

wages and salaries in the private and

government sectors.

Measures of wage and salary

change have been available from the

ECI since 1976 for private industry

workers and since 1981 for State and

local government workers. In the mid1980s, after ECI data had been available for State and local government

workers for several years, a BLS study

compared wage and salary changes in

private industry with those in State and

local government.1 The study found

that while pay increases for State and

local government workers substantially exceeded those for workers in

private industry during the early

Albert E. Schwenk is an economist in the Division of Compensation Data Analysis and Planning, Bureau of Labor Statistics.

Telephone: (202) 606-6203

E-mail: Schwenk_A@bls.gov

State and local government pay has increased more rapidly than private industry pay during some time periods

and less rapidly during others. Some of this variation can

be explained by differences in the industry and occupational mix of the two sectors. Nevertheless, over the

long-term, pay in the two sectors has increased at about

the same rate.

1980s, evidence suggests that over a

longer period (1976-84), pay in the

two sectors had increased at about the

same rate. The study also found that

when pay-change comparisons were

made for similar groups of workers in

the two sectors, pay increases were

similar even over shorter periods of

time.

After nearly 20 years of publishing

wage and salary and compensation

cost change data from the ECI, it is

time again to compare pay changes in

private industry and State and local

governments. In general, this study

confirms many of the findings of the

earlier study, but also finds some important differences. The main conclusions of this study are:

• Although during certain periods, such as the 1980s, pay in

private industry and State and

local governments increased at

substantially different rates, over

the long term—20 or 25 years—

pay gains in the two sectors are

quite similar.

• During most of the 1981-98 period, pay increases of State and
14 Compensation and Working Conditions Fall 1999

100

120

140

160

180

200

220

240

1982 1984 1986 1988 1990 1992 1994 1996 1998

local government workers were

closer to those of private sector

service industry workers than to

those of all private industry workers.

• During the 1980s, pay consistently rose faster in State and

local governments than in private industry.

• Pay changes in private industry

and State and local governments

in the 1990s have differed substantially from those in the 1980s.

During the 1990s, the rate of

pay increase in both sectors slowed dramatically, but the slowdown was greater for State and

local government workers so

their pay increased less than private industry pay.

These conclusions, based on a review of wage and salary change data,2

generally hold for compensation cost

change data as well. It should be noted

that our analysis focuses primarily on

wage and salary changes rather than

on changes in the more comprehensive measure of labor costs—total compensation. The analysis was restricted

because for several industry categories

and occupational groups, wage and

salary change data are available for a

longer time period than are compensation cost change data. Data on benefit cost changes are available for even

fewer industry and occupation series.

Chart 1 presents indexes of wages

and salaries from June 1981 to March

1999 for three employee groups: All

private industry workers, private sector service industry workers, and State

and local government workers. The

indexes show the cumulative percent

change in wages and salaries from the

base period (June 1981) to any subsequent reference point; an index level

of 140, for example, means that wages

and salaries increased 40 percent from

the base period. What is striking about

the chart is how similar the cumulative percent change in wages and salaries in State and local governments

was to that in the private sector service industry from 1981 until about

1997.

Pay change information for State

and local government workers is not

available from the ECI prior to June

1981. It is, however, possible to extend the period under review back 6

years by estimating the pay increase

for State and local government workers during September 1975-September

1981 by assuming their pay increased

at the same rate as private service industry workers’ pay during that period.3 Using that assumption, over the

entire September 1975-98 period, pay

in State and local government rose

about 216 percent compared with

about 205 percent in private industry.

Chart 2 presents another way of

looking at the pattern of wage change

for private industry and State and local governments. It shows 12-month

CHART 1. Indexes of wages and salaries, private industry, private sector service industry,

and State and local government, quarterly data, June 1981 - March 1999

Index (June 1981=100)

Private sector service industry

State and local

government

Private industry
 Compensation and Working Conditions Fall 1999 15

Compensation Cost Trends

0

2

4

6

8

10

12

0

1983 1985 1987 1989 1991 1993 1995 1997 1999

0

2

4

6

8

10

12

0

1983 1985 1987 1989 1991 1993 1995 1997 1999

CHART 2. Percent changes in wages and salaries, private industry and State and local

government, quarterly data, June 1982 - March 1999

12-month percent change

State and local

 government

Private industry

CHART 3. Percent changes in total compensation costs, private industry and State and

local government, quarterly data, June 1982 - March 1999

12-month percent change

Private industry

State and local

government
16 Compensation and Working Conditions Fall 1999

percent changes in wages and salaries

in private industry and State and local

governments. From 1982 to 1991,

State and local government pay consistently increased more rapidly than

private industry pay; from 1991 to

1996, the two sectors showed very

similar rates of pay gain; and from

1996 to 1998, private industry pay rose

faster than State and local government

pay.

How the public and private sectors differ4

Differences in rates of wage change

between private industry and State and

local government workers are to be

expected because the industry and occupational composition of their work

forces differs.5 As shown in table 1,

white-collar occupations, especially

professional specialty and technical

occupations, are more common in

State and local governments; professional specialty and technical occupations alone make up over two-fifths of

State and local employment but only

TABLE 1. Cumulative percent changes in wages and salaries, and distribution of employment by occupational group and industry category, private

industry and State and local government, June to June, selected years

All workers ......................................................... 54.21 73.61 24.41 22.1 91.91 111.91 100.0 100.0

Occupational group

White collar ............................................................... 60.71 76.51 25.61 21.61 101.81 114.61 55.1 71.2

Professional specialty and technical ...................... 66.71 -1 25.21 -1 108.71 -1 12.5 41.9

Executive, administrative, and managerial ............. 61.11 -

1 26.81 -1 104.31 -1 10.5 10.9

Sales ...................................................................... 50.51 -1 24.61 -1 87.51 -1 13.1 .6

Administrative support, including clerical ............... 60.21 -

1 25.91 -1 101.61 -1 19.0 17.8

Blue collar ................................................................. 45.21 61.51 22.41 21.41 77.71 96.01 29.8 8.2

Precision production, craft, and repair .................... 47.41 -

1 22.61 -1 80.71 -1 11.6 3.1

Machine operators, assemblers,

 and inspectors ..................................................... 46.71 -

1 22.91 -1 80.31 -1 8.6 .7

Transportation and material moving ....................... 35.91 -1 19.71 -1 62.71 -1 4.4 2.8

Handlers, equipment cleaners, helpers,

 and laborers ........................................................ 42.81 -1 23.21 -1 75.91 -1 5.2 1.5

Service ....................................................................... 52.51 68.31 22.81 24.61 87.31 109.81 15.2 20.6

Industry category

Goods producing ....................................................... 48.41 -

1 23.31 -1 83.01 -1 27.5 -

Mining ..................................................................... -1 -

1 -1 -1 -1 -1 0.8 -

Construction industry .............................................. 39.31 -1 21.01 -1 68.61 -1 5.6 1.3

Manufacturing ......................................................... 50.61 -

1 24.21 -1 86.91 -1 21.1 -

Service producing ...................................................... 58.51 -

1 24.71 -1 97.71 -1 72.5 -

Transportation, communication, and

 public utilities ....................................................... 44.21 -1 24.61 -1 79.71 -1 6.4 3.3

Wholesale trade ..................................................... 62.71 -

1 25.51 -1 104.31 -1 6.8 -

Retail trade ............................................................. 47.11 -

1 23.41 -1 81.61 -1 21.6 -

Finance, insurance, and real estate ....................... 56.91 -

1 24.71 -1 95.61 -1 7.4 -

Service industries ................................................... 73.51 77.51 25.71 21.91 118.11 116.41 30.3 62.8

Public administration .............................................. -1 66.21 -

1 21.61 -1 102.11 -1 31.8

Cumulative percent change

1981- 91 1981-98 1991-98

Percent of

employment (1990)

Occupational group and industry category

Private

industry

State and

local

government

Private

industry

State and

local

government

Private

industry

Private

industry

State and

local

government

State and

local

government

TABLE 2. Percent changes in wages and salaries for private industry and State and local

government workers, and the ratio of the two,

June to June, selected years

All workers

1981-86 ........ 27.9 35.8 1.29

1986-91 ........ 20.6 27.8 1.35

1991-96 ........ 15.9 15.5 .98

1996-98 ........ 7.4 5.7 .77

1986-98 ........ 50.1 56.0 1.22

1981-98 ........ 91.9 111.9 1.12

White collar,

 excluding sales1

1981-86 ........ 32.5 37.0 1.14

1986-91 ........ 22.7 28.9 1.27

1991-96 ........ 16.4 15.3 .93

1996-98 ........ 8.3 5.5 .66

1986-98 ........ 54.7 56.7 1.04

1981-98 ........ 104.9 114.6 1.09

Service

1981-86 ........ 36.9 37.1 1.01

1986-91 ........ 26.7 29.5 1.10

1991-96 ........ 17.0 15.6 .92

1996-98 ........ 7.5 5.4 .72

1986-98 ........ 59.3 57.8 .97

1981-98 ........ 118.1 116.4 .99

1

 In State and local governments, this category

is the same as white-collar workers, since there

are very few government sales workers.

Worker group

and

time period

Private

industry

State and

local

government

Ratio of

State and

local to

private

about one-eighth of total employment

in private industry. Similarly, service

industry workers make up nearly twothirds of State and local government

workers but less than one-third of private industry workers. Workers in

public administration, found only in

governments, make up nearly onethird of State and local government

employment.

The differences in occupation and

industry employment distributions are

important because, as also shown in

table 1, there are substantial differences

among industries and occupations in

the short- and long-term rates of wage

change. Among occupations, in both

the 1981-91 and 1991-98 periods,

white-collar occupations consistently

showed larger pay increases than bluecollar occupations, although the differences between the two occupational

groups were smaller in the 1991-98 period. Among industries, above-average increases were found in private

sector service industries in both the

1981-91 and 1991-98 periods; State

1

 Cumulative change exceeds the all-worker average. NOTE: Due to rounding, components may not equal total. Dashes indicate that data are not available.
 Compensation and Working Conditions Fall 1999 17

Compensation Cost Trends

TABLE 3. Average annual percent changes in

wages and salaries, private industry and State

and local government workers, selected

periods, June to June, selected years

All private

 industry ............ 4.4 3.2 3.9

 Private service

 industry ....... 5.7 3.3 4.7

All State and local

 government ..... 5.7 2.9 4.5

 State and local

 service

 industry ......... 5.9 2.9 4.6

Worker group 1981-91 1991-98 1981-98

TABLE 4. Average annual percent changes in wages and salaries and total compensation, private

industry and State and local government workers, March to March, selected years

Wages and salaries

All private industry ........................................... 3.8 3.2 3.5

Private service industry ............................. 4.9 3.3 4.0

All State and local government ....................... 5.1 2.9 3.8

State and local service industry ................ 5.4 2.9 3.9

Compensation costs

All private industry ........................................... 4.2 3.3 3.6

Private service industry ............................ 5.3 3.3 4.1

All State and local government ....................... 5.5 2.9 4.0

State and local service industry ................ 5.8 2.8 4.1

Compensation measure and industry 1985-91 1991-99 1985-99

and local government service industries showed that pattern in the earlier

period, but not in the later period.

Because of the differences in the

industry and occupation mix of the

workforce and in the pattern of pay

changes by industry and occupation,

any observed differences in pay increases between private industry and

State and local governments might be

explained by industry and occupation

mix differences. In that case, comparisons between private industry and

State and local governments should be

restricted to narrowly defined industries and occupations.

For this analysis, however, it was

not possible to compare wage changes

in private industry with those in State

and local governments by detailed industry and occupational group, because State and local government data

for most of those groups are not published. As previously mentioned,

many industries and occupations

prevalent in private industry simply

are not found in State and local governments, and vice versa.

The only published industry categories or occupational groups that are

reasonably comparable between private industry and State and local governments and have data from the early

1980s are the service industry and the

occupational group, white-collar workers, excluding sales.6

 (For State and

local governments, there is no published group white-collar workers, excluding sales, because there are few

sales workers in government; therefore, white-collar workers, excluding

sales were assumed to be the same as

white-collar workers.)

ship also held during the 1980s. During the 1990s, however, when all pay

increases were relatively low, pay gains

of private service industry workers

were more similar to those of all private industry workers than to those of

State and local government workers.

Evidence on compensation

costs

As noted earlier, ideally, to make comparisons over time periods, we would

want to look at trends in total compensation, rather than simply in wages

and salaries. For several series, however, data on compensation cost

changes are available for a shorter time

period than are data for wage and salary changes. For the private service

industry, for example, indexes of compensation cost change are available

only from March 1985.

Does the measure of compensation

used (and the time period covered) affect the results? Comparing chart 3

to chart 2 suggests that the conclusions

reached when looking at compensation

costs are much the same as those

reached when looking at wages and

salaries.

Table 4 also supports this conclusion. For the March 1985-91 period,

compensation costs changes for all

four categories studied were 0.4 percentage points higher than the corresponding wage and salary changes.

The patterns of compensation cost

changes for the March 1991-99 period

and the entire March 1985-99 period

were also consistent with that of the

wage and salary changes.

Table 2 breaks the 1980s and 1990s

into subperiods, and provides information for the most comparable categories—white-collar workers, excluding

sales, and the service industry.

The table shows that over the entire June 1981-98 period, pay changes

were more similar between private industry and State and local governments when looking at either specific

occupational or industry groups than

when looking at all workers combined.

In the case of the service industry, pay

changes in private industry and State

and local governments were virtually

identical.

The closeness of the relationship

found when looking at specific industries and occupation groups over the

1981-98 period breaks down when we

look at decades—the 1980s clearly differ from the 1990s. There are also differences between the early and late

years of each decade, but they appear

to be smaller than the differences

among decades. For example, during

both 1981-86 and 1986-91, pay increases in State and local governments

were larger than those in private industry, whereas in both 1991-96 and

1996-98 the reverse was true.

Table 3 brings into sharper focus

the relationships we are looking at. It

shows average annual percent

changes, which simplifies comparing

time periods of different lengths. Over

the entire 1981-98 period, pay increases for State and local government

workers were more closely related to

increases of private service industry

workers than to increases of all private industry workers. This relation-
18 Compensation and Working Conditions Fall 1999

1 Richard E. Schumann, “State and Local Government Pay Increases Outpace Five-year Rise in

Private Industry,” Monthly Labor Review, February 1987, pp. 18-20. 2 This analysis deals with changes in wages

and salaries and compensation costs, not their levels. 3

 Further evidence (besides that shown in chart

1) supporting this approach to estimating ECI State

and local government pay changes for 1975-81 is

provided in Schumann, p. 20. 4

 One difference between the two sectors not

addressed in this article is that in State and local

governments pay changes are concentrated in the

June-September period, rather than being more

evenly spread throughout the year as in private

Comparing the wage and salary

portion of table 4 with table 3 also

shows that starting the period of analysis in March 1985 rather than June

1981 changes nothing of consequence.

Of course, this finding should not be

extended too far—there are substantial

differences in the relationships in the

1990s compared with the 1980s.

industry. Because of this difference, for this study

the beginning and end month of every comparison

is the same. Thus, June 1998 is the end date for the

analysis where data were first available for June

1981 even though at the time this article was written, several more quarters of data were available. 5

 Schumann used the differences in industry

and occupational mix between the two sectors to

explain different rates of wage change. They were

also used to explain differences in pay and benefit

levels in Bradley R. Braden and Stephanie L.

Hyland, “Cost of Employee Compensation in Public and Private Sectors,” Monthly Labor Review,

May 1993, pp. 14-21. Other articles that have

compared private industry and State and local

government pay include Michael A. Miller, “The

Public-private Pay Debate: What Do the Data

Show?” Monthly Labor Review, May 1996,

pp. 18-29; and John E. Buckley, “Pay in Private Industry and State and Local Governments, 1994,” Compensation and Working

Conditions, September 1996, pp. 22-26. Note

that differences in pay and benefit levels do not

necessarily mean there are differences in pay

and benefit rates of change. 6

 Service occupations might also seem to be

similar. However, those workers differ substantially between private and State and local government—State and local government service occupations include police and firefighters whereas in

private industry, they are more likely to be janitors and cooks.

Need timely data from BLS?

Users of data from the Bureau of Labor Statistics can request a fax of news releases, historical data, and

technical information 24 hours a day, 7 days a week from the Bureau’s fax-on-demand system.

News releases of major economic indicators are available at 8:45 a.m. on the morning they are released.

Other options include tables of historical data (some going back to the 1940s) and technical information

about the Bureau’s programs and surveys. To obtain data or information from the BLS national office, call

(202) 606-6325.

To obtain data, use a touch-tone telephone and follow the voice instructions for entering document

codes and your fax telephone number. The fax-on-demand catalog, containing a list of available documents and codes, can be obtained by entering code 1000. You may request up to four documents with each

call. Faxes are sent immediately following the request. If your fax line is busy, the system attempts to

send the requested material four times before disconnecting.