3 Compensation and Working Conditions Summer 1997

T

he Bureau of Labor Statistics

has published data on

Employer Costs for Employee

Compensation (ECEC or cost levels)

for March of each year since 1987.1

These cost levels, derived from data

collected in the Employment Cost

Index (ECI) survey, are designed to

provide a snapshot of the structure of

compensation at points in time—that

is, the distribution of employer costs

among the components of compensation (wages and salaries and employee benefits such as vacations,

health insurance, and Social Security), and among industries and

occupations. This article first

reviews trends in the structure of

compensation costs, 1986 to 1996.

Trends in the level of Employer

Costs for Employee Compensation

are also reviewed in this article.

When used to show trends, the cost

levels measure something fundamentally different from what the ECI

measures. Cost levels measure the

change in average compensation

costs rather than the average change

in compensation costs. This article

describes how the two measures are

constructed, compares their trends,

and explains observed differences.

To aid in the analysis, new measures

of the precision of estimates of cost

level changes are presented.

Finally, some important uses of

cost level data are illustrated. The

key findings of the analysis are:

Measuring Trends in the

Structure and Levels of

Employer Costs for

Employee Compensation

Trends in the ECI and ECEC

This article and the following one, “Explaining the Differential Growth Rates

of the ECI and the ECEC” by Michael K. Lettau, Mark A. Loewenstein, and

Aaron T. Cushner, focus on trends in the ECI and ECEC. The article presented

here discusses trends in the distribution of employer costs among the components of compensation—wages and salaries and benefits—at points in time. The

Lettau article delves into the reasons the ECI has increased much more rapidly

in recent years than the ECEC.

For a more complete discussion of the scope of and methods used in the ECI

and ECEC series, see BLS Handbook of Methods, Bulletin 2414, Bureau of

Labor Statistics, September 1992, pp. 56-66, and “Estimation Procedures for

the Employment Cost Index,” Monthly Labor Review, May 1982, pp. 40-42.

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

(202) 606-6203.

BY ALBERT E. SCHWENK

The ECI is the preferred measure of trends in compensation cost levels

because it measures pure wage rate and compensation cost changes.

Cost levels, however, provide information on compensation cost trends

not available from the ECI, and generally are a better measure of

changes in the welfare of workers because, for example, if compensation cost levels increase less rapidly than the ECI, that suggests that

there has been a shift in employment toward relatively low-paying

industries and or occupations.
 Compensation and Working Conditions Summer 1997 4

• Benefits made up 27.0 percent

of total compensation in 1986,

28.9 percent in 1994, and 28.1

percent in 1996;

• Employee costs for insurance

followed much the same

pattern: 5.5 percent of total

compensation in 1986, 7.2

percent in 1994, and 6.5

percent in 1996;

• The gap between low- and

high-paying industries is wider

for compensation costs than

for wages and salaries, and has

remained fairly constant over

time;

• Over the period 1986-96,

compensation costs in private

industry rose 45.0 percent as

measured by the ECI and 32.0

percent as measured by the

cost levels; and

• Differences between the cost

levels and ECI indexes in

changes over time can be

explained by differences in the

way the two measures are

constructed—the set of

weights used and the way the

data are linked from quarter to

quarter.

Collecting compensation cost

data

The ECI, the source of the data

for both the indexes and the cost

levels, is a quarterly survey of the

cost to the employer for an hour of

work. ECI data relate to payroll

periods including the 12th of March,

June, September, and December.2

The wage and benefit data collected

are used to estimate both indexes

and cost levels; the two measures

differ only in the way the data are

combined across industries and

occupations.

There are two separate steps in

the data collection process: the

initiation and the quarterly update.

Initiation occurs the first time a

trained field economist visits an

establishment to collect data for the

survey. The update occurs each

subsequent quarter the establishment

is in the ECI sample. Generally, an

establishment is in the ECI sample

for about 5 years before it is replaced

by establishments from a new

sample.

At initiation of each establishment, the field economist informs

the respondent about the survey,

randomly selects from 4 to 8 jobs—

the number depending on the size of

the establishment—to represent the

establishment, and then obtains

wage, benefit, and other information

required to estimate the cost of the

compensation package for each

surveyed job. The jobs selected in

each establishment at the time of

initiation are the same ones for

which data are collected in the

quarterly updates; they are defined

narrowly enough that all workers in

the job carry out the same task at

roughly the same level of skill.

Straight-time wage and salary

rates are used as the wage measure.

These include total earnings before

payroll deductions, but exclude

premium pay for overtime and for

work on weekends and holidays,

shift differentials, nonproduction

bonuses, and lump-sum payments

provided in lieu of wage increases.

Production bonuses, incentive

earnings, commission payments, and

cost-of-living adjustments are

included in straight-time wage and

salary rates. Salaries are converted

to an hourly rate by dividing by the

number of paid hours.

To measure benefit costs, the field

economist first identifies the ECI

benefits existing for each surveyed

job in the establishment, and then

collects information required to

estimate their cost per hour worked.

Benefit costs are measured using a

current cost approach—annual costs

based on the current price of the

benefit under current plan provisions.3

 Once the annual cost is

determined, that cost is divided by

annual hours worked, that is, the

annual work schedule (for example,

34 hours per week times 52 weeks

per year) minus annual hours for

vacations, holidays, and other leave,

plus annual overtime hours.

The quarterly update is usually

done by a combination of mail and

telephone. Forms are sent to each

respondent describing previously

reported wage and salary rates and

benefit provisions for each surveyed

occupation, and the respondent is

asked to identify changes. A change

in wages and salaries occurs if

average wages change, regardless of

whether it is due to pay increases,

longevity payments, changes in

commissions, or changes in the

workers in the occupation.

As defined by the ECI, benefit

costs in an establishment can change

for any of the following reasons: (1)

the cost for an unchanged benefit

plan may increase or decrease (for

example, the cost of a 2-week

vacation after 5 years of service

increases because of a wage-rate

increase, or an insurance carrier

raises premiums); (2) a benefit plan

may be added or eliminated (for

example, a dental plan may be added

to a medical policy); (3) the provisions of a benefit plan may be

modified (for example, the type of

work covered by a dental plan is

enhanced); or (4) usage of the

benefit may change because of

changes in the plan (for example,

more employees elect health insurance because of improved dental

benefits).

Specifically excluded from the

measure of benefit cost change are

changes in the usage of a benefit,

such as additional overtime hours,

not related to changes in the plan

provisions. Because some changes

in benefit costs are specifically

excluded from the quarterly updates

and because at any given point in

time establishments have been in the

ECI sample an average of 21⁄2 years,

estimates of average cost levels in a

given quarter may not be the same as

would be the case if each establishment were initiated each quarter.
5 Compensation and Working Conditions Summer 1997

However, analysis has shown that

the effect on cost levels of not

picking up complete current information each quarter is small.

Because the ECI sample is

replaced over a 5-year period, in any

given quarter about 1/20th of the

sample of establishments is new.

Consequently, another potential

source of changes over time in cost

levels is change in the sample.

Estimating published cost

levels

Once the wage and benefit data

for each establishment are collected

and converted to a cost per hour

worked, aggregate cost levels are

estimated. Estimation of cost levels

is essentially a two-step process.

First, the average compensation cost

is calculated for each industry/

occupation category defined for the

survey. Second, these average costs

are weighted and aggregated.

The industry and occupation

categories defined for cost levels are

the same as those defined for the

ECI. The industry structure of the

ECI is based on the 1987 Standard

Industrial Classification (SIC)

system, as defined by the U.S. Office

of Management and Budget. For the

ECI, most industry categories for the

private sector are specified at the 2-

digit SIC level, such as textile

manufacturing or personal services.

The industry categories for State and

local governments vary from specific

3-digit SIC’s, such as elementary

and secondary schools, to broader

major industry divisions, such as

public administration.

The occupational categories for

the ECI are those used for the

Census of Population. The census

defines about 440 detailed jobs

within the scope of the ECI. Each

surveyed job in the ECI is placed in

one of those census jobs, which, for

index and cost level estimation, are

then mapped into 10 major occupational groups, such as professional

specialty and precision production,

craft, and repair occupations.

The first step in the process of

estimating cost levels—computing

the average compensation cost in

each industry/occupation category—

uses virtually the same set of

establishments and jobs as is used to

calculate the ECI indexes for the

corresponding quarter.4 The weights

used to compute the averages reflect

the probability of selection of the

establishment and job.

The second step in the process of

estimating cost levels—aggregating

the industry/occupation average

compensation costs—uses current

employment counts as weights. The

March 1996 compensation cost

levels, for example, were calculated

using the March 1996 employment

counts for each industry category

defined for the ECI from the

Bureau’s Current Employment

Statistics (CES) program

benchmarked5 to the 1995 universe

of all establishments (the unemployment insurance or UI ES-202 data

file). The employment data for these

industries were then distributed to

major occupational groups (such as

executives, administrators, and

managers or machine operators,

assemblers, and inspectors) using the

relative importance of the groups as

estimated by the ECI sample.

Because, as noted above, the ECI

establishment sample is completely

replaced, industry by industry, on

about a 5-year cycle,6 the major

occupational group employment

counts from the ECI are, on average,

21⁄2 years old. However, comparisons of cost level estimates showed

that differences of a few years in the

age of the occupational employment

data within industries have a

negligible impact on the estimates.

Changes over time in the

structure of compensation

costs

The relative importance of wages

and salaries and selected benefit

categories for private industry

workers by year, 1986-96, is shown

in table 1.7 Benefits made up 27.0

percent of compensation costs in

Table 1. Employer costs for employee compensation as a percent of total compensation costs, by benefit category, March 1986-96

 Compensation component 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Wages and salaries .................................... 73.0 73.2 72.7 72.7 72.4 72.3 71.8 71.3 71.1 71.6 71.9

Benefit costs ............................................... 27.0 26.8 27.3 27.3 27.6 27.7 28.2 28.7 28.9 28.4 28.1

 Paid leave.................................................. 7.0 6.9 7.0 7.0 6.9 6.8 6.8 6.6 6.5 6.4 6.4

 Supplemental pay ..................................... 2.3 2.4 2.4 2.4 2.5 2.3 2.4 2.5 2.6 2.8 2.8

 Nonproduction bonuses .......................... 0.7 0.9 0.8 0.8 1.0 0.9 1.0 1.1 1.2 1.3 1.3

 Insurance .................................................. 5.5 5.4 5.6 6.0 6.1 6.5 6.9 7.2 7.2 6.7 6.5

 Health insurance ..................................... * * * * * 6.0 6.3 6.6 6.7 6.2 5.9

Retirement and savings ............................. 3.8 3.6 3.3 2.9 3.0 2.9 2.9 2.9 3.0 3.0 3.1

Legally required .......................................... 8.4 8.4 8.8 8.9 9.0 9.1 9.1 9.3 9.4 9.3 9.1

 Social security ........................................ 5.6 5.6 5.9 5.9 6.0 6.0 6.0 5.9 5.9 6.0 6.0

 Workers’ compensation .......................... 1.5 1.6 1.7 1.9 2.1 2.1 2.2 2.3 2.4 2.3 2.3

* Data not available .
 Compensation and Working Conditions Summer 1997 6

March 1986, 28.9 percent in March

1994, and 28.1 percent in March

1996. Insurance, mainly health,

made up 5.5 percent of compensation costs in 1986, 7.2 percent in

1994, and 6.5 percent in 1996. For

retirement and savings plans, these

percentages were 3.8, 3.0, and 3.1,

respectively.

The same general pattern in

benefit costs as a percent of compensation found for all private industry

workers is evident for all of the

major industry and occupational

categories, as shown in table 2. The

table also shows that the substantial

differences among industries and

occupations in the proportion

benefits make up of total compensation have remained roughly constant

over time. For example, in March

1986, benefits were relatively

important for blue-collar workers

and in goods-producing industries,

and that continues to be the case.

Does this pattern of consistency

over time hold up for individual

benefits? Information for three

benefit categories—insurance,

retirement and savings, and legally

required benefits—is provided in

table 3.

Generally, as was true for benefits

as a whole, for benefit categories the

relationship among industries and

occupations in the relative importance of a benefit has remained the

same over time. For example,

insurance was relatively more

important for goods-producing

industries and blue-collar workers

than for service-producing industries

or white-collar or service workers in

1986, and the same is true in 1996.

A major exception to this pattern is

retirement and savings plans for

blue-collar workers, which are

nearly as important in 1996 as in

1986, despite the general decline in

the importance of those benefits.

Another way of looking at the

data is to compare the relative pay of

private sector major industry groups

over time. For example, are industries that were relatively high paying

in 19878 also relatively high paying

in 1996, and is the relationship the

same for wages as for total compensation costs? Table 4 provides indexes of compensation and wage and

Table 2. Benefit costs as a percent of total compensation for major industry and occupational categories in private

industry, March 1986, 1994, and 1996

Private industry workers ......................................... 27.0 28.9 28.1

 Goods-producing industries .................................. 30.0 33.5 32.4

 Service-producing industries ................................ 25.4 26.9 26.3

 White-collar workers ............................................. 25.6 27.3 26.8

 Blue-collar workers ............................................... 30.3 33.2 31.9

 Service workers .................................................... 24.0 24.5 24.1

Industry and occupational category March 1986 March 1994 March 1996

Table 3. Selected benefit categories as a percentage of total compensation costs, private industry, by major industry

and occupational categories, March 1986, 1994, and 1996

Benefit, industry, and occupation category March 1986 March 1994 March 1996

Insurance

 Private industry workers ......................................... 5.5 7.2 6.5

 Goods-producing industries ................................... 6.4 8.9 7.8

 Service-producing industries ................................. 5.1 6.5 5.9

 White-collar workers .............................................. 5.0 6.7 6.1

 Blue-collar workers ................................................ 6.5 8.6 7.8

 Service workers ..................................................... 5.0 5.6 5.2

Retirement and savings

 Private industry workers .......................................... 3.8 3.0 3.1

 Goods-producing industries ................................... 4.3 4.1 3.7

 Service-producing industries ................................. 3.5 2.6 2.9

 White-collar workers .............................................. 4.0 2.9 3.1

 Blue-collar workers ................................................ 3.8 3.7 3.6

 Service workers ..................................................... 1.8 1.4 1.5

Legally required

 Private industry workers .......................................... 8.4 9.4 9.1

 Goods-producing industries ................................... 8.9 10.0 9.8

 Service-producing industries ................................. 8.1 9.1 8.8

 White-collar workers .............................................. 7.2 7.9 7.8

 Blue-collar workers ................................................ 10.0 11.4 11.0

 Service workers ..................................................... 10.5 11.7 11.6
7 Compensation and Working Conditions Summer 1997

salary costs to illustrate this point.

Several things are evident: In

both 1987 and 1996, the gap

between the high- and the lowpaying industries was greater for

compensation costs than for wages

and salaries. Also, for both measures, industries that were highpaying in 1987 were high-paying in

1996, those low-paying in 1987 were

low-paying in 1996, and there was

no consistent tendency for the gap

between the high and the low to

widen or narrow. One of the more

dramatic movements between 1987

and 1996 was for transportation and

public utilities, where the compensation cost advantage dropped from

50.8 percent above the private industry average to 38.5 percent

above.9 It is also interesting to note

that in every industry shown, the

wage and salary relative moved in

the same direction as the compensation cost relative between 1987 and

1996.

Table 5 provides a similar review

of the compensation cost structure by

occupation in 1987 and 1996. It

shows the same general pattern as

for industries, except there is not the

same consistent pattern of the gap

between the high- and low-paying

being wider for compensation costs

than for wages and salaries.

Changes over time in cost

levels

Cost levels from the ECI were not

designed to measure the rate of

change in the cost of hiring a fixed

set of labor services. Cost levels can

change either because workers in

particular jobs are paid at a higher

rate, or because there has been a

shift in employment toward higheror lower-paying industries and

occupations. Because cost level

changes result from a variety of

factors, they are difficult to interpret,

but they are better indicators of

changes in worker welfare than are

fixed weight indexes.

The pattern of compensation cost

and wage and salary change by

industry and occupational group

over the entire period for which data

are available for most industries and

occupations is shown in table 6.

Very dramatic differences among

both industries and occupations are

evident: Among industry groups the

change in compensation costs

ranged from 19.7 percent for

transportation and public utilities to

39.2 percent for services. Among

occupational groups, the change

ranged from 22.6 percent for

transportation and material moving

occupations to 47.3 percent for

professional specialty and technical

occupations.

The pattern of changes in

compensation costs and wages and

salaries year-to-year for private

industry workers is shown in table 7.

In addition, as an aid to interpreting

the findings, measures of precision

—standard errors—are included.10

The standard error can be used to

define a range (confidence interval)

around the cost estimate. For the

ECI, the confidence interval normally includes 2 standard errors. If

all possible samples were selected to

estimate the population value (in this

case, the cost per hour worked

figure), the interval formed by

computing 2 standard errors on each

side of the mean from each sample

would include the true population

value approximately 95 percent of

the time.11

An example will help to illustrate

the use of standard errors. Consider the change in compensation

costs between March 1995 and

March 1996. In March 1995,

compensation costs of private

industry workers averaged $17.10.

In March 1996, they averaged

$17.49, an increase of $0.39. That

would suggest that compensation

costs increased 2.4 percent. However, since the standard error on

that estimated change is $0.086, we

can be 95 percent confident only that

the “true” increase was somewhere

between $0.22 and $0.56 ($.39 plus

or minus two times $.086), that is,

the percent increase was between 1.3

percent and 3.4 percent.

Comparison of cost-level

changes with index changes

Although compensation cost

changes can be calculated from the

cost levels, for most purposes the

preferred measure of those changes

is the ECI. How do the two measures compare?

Year-to-year changes in the ECI

and in the cost levels are shown in

table 8. Research is underway to

estimate the significance of the

differences between the year-to-year

change in these two measures. Over

the long-term, however, comparisons

between the two measures can be

made. This is because almost

invariably the ECI change has been

larger than the cost level change, so

that over periods spanning several

years (say 5 years) the difference

between the two measures is large

enough to be statistically significant

because the magnitude of the

economic change overwhelms the

sampling error.

From March 1986 to 1996,

private industry compensation costs

rose 45.0 percent as measured by the

ECI and 32.0 percent as measured by

cost levels. For wages and salaries,

the numbers were 39.5 and 30.1

percent, respectively, while for benefits they were 59.2 and 37.2 percent,

respectively. Thus, over the past

decade the ECI rose substantially

more than the cost levels: a third

more for compensation costs, a

quarter more for wages and salaries,

and half again as much for benefit

costs.

Explaining the differences in

trends

To help explain why changes in

the cost levels differ from changes in

the ECI indexes, it is necessary to

describe the method used to derive

the indexes and compare it with the

procedure used to calculate the cost

levels.

As was the case for cost levels,

there are essentially two steps in the

process of estimating changes in the

ECI.12 First, within each industry/

occupation category, the mean
 Compensation and Working Conditions Summer 1997 8

Table 4. Indexes of compensation costs and wages and salaries, by industry category, March 1987 and March 1996.

(All private industry workers=100)

Compensation costs Wages and salaries

March 1987 March 1996 March 1987 March 1996

Private industry workers ............................ 100.0 100.0 100.0 100.0

 Goods-producing industries ..................... 118.2 121.6 113.1 114.3

 Manufacturing ........................................ 115.6 120.0 109.6 112.3

 Durable goods ...................................... 124.8 128.6 117.1 118.6

 Nondurable goods ................................ 102.2 107.9 98.9 103.6

 Service-producing industries ................... 92.5 93.1 94.5 95.5

 Transportation and public utilities ........... 150.8 138.5 140.1 131.2

 Wholesale trade ..................................... 112.9 108.9 114.3 111.1

 Retail trade ............................................. 58.5 54.5 61.7 59.6

 Services ............................................... 92.0 98.2 95.0 101.4

Industry

Table 5. Indexes of compensation costs and wages and salaries, by occupational group, March 1987 and March 1996.

(Private industry workers=100)

Compensation costs Wages and salaries

March 1987 March 1996 March 1987 March 1996

Private industry workers ................................................... 100.0 100.0 100.0 100.0

 White-collar workers ....................................................... 115.9 120.6 118.1 122.7

 Professional specialty and technical ............................. 147.6 166.9 149.1 168.9

 Executive, administrative, managerial ........................... 177.4 189.4 181.7 191.3

 Administrative support, clerical ..................................... 81.5 85.4 80.5 85.0

 Blue-collar workers ......................................................... 100.1 97.4 95.4 92.3

 Precision production, craft, repair ................................. 125.6 126.5 121.3 120.0

 Machine operators, assemblers, inspectors ................. 92.7 88.5 85.9 81.2

 Transportation and material moving .............................. 103.1 97.0 98.2 92.4

 Handlers, equipment cleaners, helpers, laborers ......... 73.1 69.0 70.5 67.4

 Service occupations ....................................................... 47.9 49.2 50.5 51.9

Industry or occupation

Occupational group

Table 6. Compensation costs and wages and salaries for selected industry and occupational groups in private industry and the

percent changes, March 1987 and March 1996

Compensation costs Wages and salaries

March March Percent March March Percent

1987 1996 change 1987 1996 change

 All private industry workers ......................................... $13.42 $17.49 30.3 $9.83 $12.58 28.0

Industry group

 Goods-producing industries ......................................... 15.86 21.27 34.1 11.12 14.38 29.3

 Manufacturing .......................................................... 15.51 20.99 35.3 10.77 14.13 31.2

 Service-producing industries ....................................... 12.41 16.28 31.2 9.29 12.01 29.3

 Transportation and public utilities ............................... 20.24 24.22 19.7 13.77 16.51 19.9

 Wholesale trade ......................................................... 15.15 19.04 25.7 11.24 13.98 24.4

 Retail trade ................................................................. 7.85 9.54 21.5 6.07 7.50 23.6

 Services ..................................................................... 12.34 17.18 39.2 9.34 12.76 36.6

Occupational group

 White-collar workers .................................................... 15.56 21.10 35.6 11.61 15.44 33.0

 Professional specialty and technical .......................... 19.81 29.19 47.3 14.66 21.25 45.0

 Executive, administrative, managerial ........................ 23.81 33.12 39.1 17.86 24.07 34.8

 Administrative support, clerical .................................. 10.94 14.93 36.5 7.91 10.69 35.1

 Blue-collar workers ...................................................... 13.43 17.04 26.9 9.38 11.61 23.8

 Precision production, craft, repair .............................. 16.85 22.12 31.3 11.92 15.10 26.7

 Machine operators, assemblers, inspectors .............. 12.44 15.48 24.4 8.44 10.22 21.1

 Transportation and material moving ........................... 13.83 16.96 22.6 9.65 11.62 20.4

 Handlers, equipment cleaners, helpers, laborers ...... 9.81 12.07 23.0 6.93 8.48 22.4

 Service occupations .................................................... 6.43 8.61 33.9 4.96 6.53 31.7
9 Compensation and Working Conditions Summer 1997

Table 7. March-to-March changes in compensation costs, wages and salaries, and benefit costs, and associated standard errors,

private industry workers, 1986-96.

Compensation costs Wages and salaries Benefit costs

Estimate Standard Estimate Standard Estimate Standard

of change error of change error of change error

1986-87 ...................................... $0.17 $0.208 $0.16 $0.160 $0.02 $0.056

1987-88 ...................................... .37 .142 .19 .113 .17 .036

1988-89 ...................................... .49 .080 .36 .058 .13 .027

1989-90 ...................................... .68 .108 .46 .079 .23 .037

1990-91 ...................................... .44 .086 .30 .062 .14 .034

1991-92 ...................................... .74 .115 .44 .082 .28 .043

1992-93 ...................................... .56 .086 .32 .071 .25 .026

1993-94 ...................................... .38 .077 .24 .055 .14 .031

1994-95 ...................................... .02 .136 .11 .101 -.09 .047

1995-96 ...................................... .39 .087 .33 .068 .06 .029

March to March

Table 8. Comparison of 12-month percent changes in compensation measures from the Employment Cost Index (ECI) and

Employer Costs for Employee Compensation (cost levels), private industry workers, 1987-96

1987 ................................................................................ ECI 3.2 3.1 2.8

Cost levels 1.3 1.7 0.6

1988 ................................................................................ ECI 3.8 3.3 5.9

Cost levels 2.8 1.9 4.7

1989 ................................................................................ ECI 4.6 4.2 5.4

Cost levels 3.6 3.6 3.4

1990 ................................................................................ ECI 5.2 4.2 7.2

Cost levels 4.8 4.4 5.9

1991 ................................................................................ ECI 4.4 4.0 5.8

Cost levels 2.9 2.8 3.4

1992 ................................................................................ ECI 4.2 3.4 6.3

Cost levels 4.8 3.9 6.6

1993 ................................................................................ ECI 3.5 2.7 5.6

Cost levels 3.5 2.8 5.5

1994 ................................................................................ ECI 3.3 2.9 4.4

Cost levels 2.3 2.0 2.9

1995 ................................................................................ ECI 2.9 2.9 2.9

Cost levels 0.1 0.9 -1.8

1996 ................................................................................ ECI 2.7 3.2 1.6

Cost levels 2.3 2.7 1.2

Year ended March Compensation

costs

Wages and

salaries

Benefit

costs

Measure
 Compensation and Working Conditions Summer 1997 10

The Effects of Fixed Weights

The following example illustrates the effects of using fixed rather than current weights. Consider the case of an employer

with two types of workers, electricians and janitors. In March 1995, the firm employs 10 electricians at $14 per hour and 10

janitors at $6 per hour. Both the average wage and the average wage rate are $10.

NUMBER x WAGE RATE = AGGREGATE

Electricians 10 X $14.00 = $140.00

Janitors 10 X 6.00 = 60.00

20 $200.00

$200.00 /20 = $10.00

In March 1996, both groups are given a 10-percent wage increase, but now only 5 janitors are employed. The average wage

(without fixed weights) increases to $12.47:

NUMBER x WAGE RATE = AGGREGATE

Electricians 10 X $15.40 = $154.00

Janitors 5 X 6.60 = 33.00

15 $187.00

Average wage: $187.00/15=$12.47

Average wage change: $12.47/$10.00 = 1.247 or a 24.7-percent increase.

The increase in the average wage reflects the 10-percent increase in the wage rates and the relative decrease in the number of

workers in the low-wage occupation of janitor.

But when fixed employment weights are used (that is, the number of janitors remains fixed at 10), the average change in wage

rates is calculated, not the change in the average wage.

NUMBER x WAGE RATE = AGGREGATE

Electricians 10 X $15.40 = $154.00

Janitors 10 X 6.60 = 66.00

20 $220.00

Average wage rate: $220.00/20 = $11.00

Wage-rate change: $11.00 /$10.00 = 1.10, or a 10-percent increase.

In this case, the increase is 10 percent, the size of the wage-rate increase which was granted to both occupations.

compensation cost (wages plus total

benefit cost) is calculated. Second,

these means are combined across the

categories using the appropriate

weights.

Step two in the process, applying

the weights to combine industry/

occupation categories,13 is the more

straightforward and is discussed

first. As noted above, the weights

for the ECI are fixed. Currently,

they are employment counts for

1990, largely from the Bureau’s

Occupational Employment Survey.

14

These weights are applied to both

the current survey month and the

prior survey month (say, March 1996

and December 1995) average

compensation costs by industry and

occupation category. These

weighted compensation costs are

then combined across industry/

occupation categories to obtain

indexes and percent changes for

broader groups of industries and

occupations. The potential impact of

the use of fixed rather than current

weights is illustrated by the example

in the box.
11 Compensation and Working Conditions Summer 1997

Step one in the estimation of the

ECI is calculation of the mean

compensation cost in each industry/

occupation category. Mean compensation in an industry/occupation

category for a particular survey

month is that category’s compensation bill in the base period (June

1989) times the cumulative average

compensation change in that

category since the base period. The

cumulative change in compensation

costs is found each quarter by

multiplying together the ratios of

average compensation costs in the

current survey month and the

average compensation costs in the

prior survey month. For example, if

the cumulative change in compensation costs (expressed as a ratio) was

1.250 for a particular industry/

occupation category as of December

1995, and compensation costs in that

category averaged $16.80 in March

1996 and $16.00 in December 1995

(a 5-percent increase, or 1.05

expressed as a ratio), then the

cumulative change as of March 1996

would be 1.3125 (1.25 times 1.05).

Thus, the mean compensation

reflects not only the current establishment and occupation sample, but

all samples since the base period.

In calculating the average

compensation costs for an industry/

occupation category for the current

and prior survey months, the effect

of changes in the sample of establishments is largely removed by the

use of “matched quotes.” That is,

the percent change in compensation

costs between December 1995 and

March 1996 is calculated from

average compensation costs for those

2 months using data only from those

establishment/occupations in the

ECI sample in both months.

The use of matched quotes is

especially important for the ECI

because of the need to periodically

replace the sample of establishments.

In order to keep the sample current

and to reduce the burden on individual respondents, the ECI completely replaces the establishment

sample over about a 5-year period.

That is, each year about one-fifth of

the sample is replaced by a new set of

establishments. (Until 1997 this was

done industry-by-industry; currently it

is done on a cross-industry, cross-area

basis.) To further enhance the

currency of the ECI, a sample of

newly formed establishments

(“births”) is introduced each year.

Matched quotes “chain out” the

effects of changes in the sample of

establishments and occupations. That

is, if a new sample has lower compensation costs than the old sample, that

would not be reflected in the ECI

because the averages from the new

sample are never compared to

averages in the old sample in index

calculation.

The differences between the cost

levels and the indexes in index procedures are summarized in the table

below.

This table suggests several

possible explanations of why the ECI

has consistently risen more rapidly

than the cost levels.1 5 Among these

are the differences in the way data

are linked from quarter to quarter

and in the weights used for aggregation.

Lettau, Loewenstein, and Cushner

attempted to determine which of the

two steps in the estimation of

indexes and cost levels accounted for

their different rates of increase in

compensation costs. To do this, they

constructed hybrid indexes using two

approaches. One approach mixed

the first step in computing the cost

levels with the second step in

estimating the ECI. The second

approach mixed the first step in

calculating the ECI with the second

step in estimating the cost levels.

When Lettau, Loewenstein, and

Cushner estimated compensation

cost indexes using the first approach,

they found that the aggregation

weights—the second step—accounted for about three-fifths of the

difference between the two measures

of compensation cost change. When

they estimated the indexes using the

second approach they found that the

method used to calculate cell

means—the first step—accounted

for about two-thirds of the difference. The authors concluded that

while the two approaches to decomposing the change in compensation

costs yielded differing estimates of

the proportion of the ECI-cost levels

differential accounted for by the two

stages in the estimation process, and

while the results depended on the

measure of compensation and the

time period examined, it seems

likely that each step accounts for at

least a third of the differential.

Since it has often been assumed

that the main difference between the

ECI and the cost levels is in the

Step ECI Cost levels

1. Compute mean cost in each Calculate average cost in base Calculate average cost in the

industry/occupation cell. period, and then move, quarter by current quarter.

quarter, using ratios of current

quarter to prior quarter costs for

matched quotes.

2. Aggregate costs across cells. Aggregate current and prior Aggregate current quarter cost

quarter costs using fixed employ- using current employment counts.

ment counts (currently 1990).
 Compensation and Working Conditions Summer 1997 12

second step—the weights used for

aggregation—this finding that the

first step has an important impact

requires explanation. As noted

above, in the first step only for the

ECI is there a link between survey

months. The link is important

because of the continual sample

replacement in the ECI. The ECI

sample of establishments and

occupations is replaced over about a

5-year period, so each year one-fifth

of the sample is replaced. To

minimize the effect of sample

changes, the ECI uses matched

quotes to estimate changes. That is,

the change between March and June

of a given year is computed from

data from establishments for which

data are available for both months.

Similarly, the change between June

and September is calculated from

quotes which are available for both

months. With cost levels, in

contrast, there is considerable

change in the sample from one

March to the next—generally, less

than about 80 percent of the observations will remain from one year to

the next.

Adding to the volatility when

there is no link between quarters is

the fact that when the ECI sample is

replaced the new samples consistently have lower compensation

costs, especially benefits.16 Why

would new samples consistently

have lower pay? We have no solid

evidence that explains this trend, but

several possibilities could account

for the pattern.

One is that the characteristics of

the new samples differ from those of

the old sample. For example, the

new samples might reflect recent

changes in the economy, such as a

higher proportion of part-time

workers, nonunion establishments,

or small establishments, characteristics associated with lower pay.

While the ECI sampling method

attempts to account for new business

formations by studying a sample of

establishment “births” each year, the

ECI may not be fully effective in

picking up births. Also, there are

differential sample loss rates in the

ECI; it may be that lower-paying

establishments are more likely to

drop from the sample, either from

going out of business or refusing to

cooperate in the survey. Finally,

certain shifts in the composition of

the work force that occur in old as

well as new establishments could

account for these differences. For

example, if there is a shift toward

part-time employment in old

establishments, this would not be

picked up because such changes are

linked out.

Uses of historical cost levels

data

A historical series on cost levels

can be used for two main purposes:

to show trends in the structure of

compensation (the relative importance of individual employee

benefits, and differences among

industries and occupations), and to

show trends in average compensation costs.

Showing trends in the structure of

compensation is the main use of

historical data on cost levels. These

data show, for example, the dramatic

growth in health insurance costs and

subsequent slowing.

The ECI as a measure of trends

in compensation cost levels, is not

affected by changes in the employment distribution among industries

and occupations with wage and

compensation levels, that is, it

measures pure wage rate and

compensation cost changes.

Cost levels provide information

on compensation cost trends not

available from the ECI. They are

generally a better measure of

changes in the average welfare of

workers because, for example, if

compensation cost levels increase

less rapidly than the ECI, that

suggests that there has been a shift

in employment toward relatively

low-paying industries and or

occupations.

Caution must be exercised when

comparing trends in cost levels with

trends in the ECI because over short

periods of time the observed

differences between the two measures are not likely to be statistically

significant. Over the longer term—

5 years or more—the difference

may indicate change in the distribution of hourly compensation

between relatively low and relatively

high paying occupations and

industries.
13 Compensation and Working Conditions Summer 1997

—ENDNOTES—

1

 In addition, data for March 1986 are now

available. See pp. 112-117 of this issue of Compensation and Working Conditions.

2

 Although cost levels could be estimated for

all four quarters of the year, only March estimates

are published to avoid emphasizing trends in that

series.

3

 See Felicia Nathan, “Analyzing Employers’

Costs for Wages, Salaries, and Benefits,” Monthly

Labor Review, October 1987, pp. 6-7, for a more

complete discussion of how benefit costs per hour

worked are calculated.

4

 Beginning in 1996, establishment/occupation observations that had reported incorrect data

in the previous quarter were used to estimate the

cost levels, but not the indexes. The logic behind

this distinction is that for indexes, both the current

and prior quarter data must be correct since a ratio is calculated from the two, while for cost levels, only the current quarter data must be correct.

5

 Benchmarking uses the results of a census to

improve the accuracy of a sample. In this case,

employment counts from the Unemployment Insurance (UI) program are assumed to be the

“truth” because virtually all establishments within

the scope of the ECI are included. Consequently,

the employment counts from the CES program

are adjusted to be consistent with the UI counts.

6

 Beginning in 1996, the ECI sample is being

replaced on a cross-industry basis, rather than industry by industry. That is, rather than replacing

the sample for particular industries each year, onefifth of the sample is replaced each year regardless of industry. The replacement cycle is still

about 5 years, however.

7

 Note that the set of benefits collected in the

ECI has changed somewhat over time, to reflect

changing compensation practices. For example,

beginning in 1995, data were collected for defined

benefit and defined contribution pension plans,

rather than for pension and savings and thrift plans.

Also beginning in that year, data were collected

for the Old Age Survivors Disability Insurance

(OASDI) and Medicare separately, rather than

only for the two combined, and for both long- and

short-term disability insurance. At the level of

benefit detail shown in this table, however, the

benefit definitions are consistent over time.

8

 The analysis uses data for 1987 rather than

for 1986, because data were of publishable quality for fewer industries in the earlier year.

9

 For a discussion of some of the factors affecting rates of pay increase in different industries, see

Albert E. Schwenk, “Trends in the differences between union and nonunion workers in pay using

the Employment Cost Index,” Compensation and

Working Conditions, September 1996, pp. 27-33.

10 See the appendix for a description of how

the standard errors of differences are calculated,

and their interpretation. Note that while standard

errors are available for cost levels, they usually

are expressed as relative errors, the ratio of the

standard error to the estimate. For analysis of

changes in cost levels, use of standard errors

makes the exposition simpler.

11 Note that standard errors relate to differences that occur from sampling errors, but not from

nonsampling errors. Sampling errors are differences that occur between the results computed

from a sample of observations and those computed

from all observations in the population.

Nonsampling errors are not measured. They include such things as survey nonresponse, data collection errors, and processing errors. Survey

nonresponse is due to sample members that are

unable or unwilling to participate in the survey;

data collection errors include incorrect data provided by the respondent or definitional difficulties; and processing errors include errors in recording, coding, and entering data. Although

nonsampling error is not measured, many procedures for reducing such errors are in place primarily through quality assurance programs. These

include data collection reinterviews, observed interviews, computer edits of the data, and systematic professional review of the reports on which

the data are recorded. Extensive training of field

economists is also conducted to maintain high standards in data collection.

12 The procedure described here does not precisely reflect the mechanics of index construction,

but is used to aid in the exposition by paralleling

the procedure used to estimate cost levels.

13 The industry and occupation categories defined for the indexes are identical to those for the

cost levels.

14 See Albert E. Schwenk, “Introducing 1990

Weights for the Employment Cost Index,” Compensation and Working Conditions, June 1995, pp. 1-5.

15 This section is based largely on Michael

Lettau, Mark A. Loewenstein, and Aaron Cushner,

“Explaining the Differential Growth Rates of the

ECI and the ECEC,” pp. 15-23 of this issue of

Compensation and Working Conditions.

16 For a more complete discussion of the effects of sample replacement on the ECI and the

cost levels, see Michael K. Lettau and Mark A.

Loewenstein, “Sample Replacement in the ECI,”

Research Report, Compensation Research and

Program Development Group, Bureau of Labor

Statistics, October 1996.
 Compensation and Working Conditions Summer 1997 14

Because cost levels are estimates

from a probability sample, year-toyear changes are likely to differ from

results that would be obtained from

annual complete censuses of the

employees within the scope of the

survey (the survey population). The

difference between an estimate

calculated from a specific sample

and an average for all samples that

could be drawn from the survey

population using the same methodology for the same statistic is the

sampling error.

Calculating standard errors for

year-to-year changes in cost levels

involves two steps. First, standard

errors and related information must

be calculated for each of the pair of

years. Then, the standard error of

the difference is calculated. This

second step takes account of the fact

that there is a high correlation

between the estimates for adjacent

years, since about 80 percent of the

sample is the same in the 2 years.

Estimating standard errors on

each year’s levels is difficult because

the cost levels estimator, like estimators in most large-scale surveys, is a

complex product of ratios. The standard error is estimated by a “balanced repeated replication” method.

Replication methods involve

taking a subset of the sample

selected under the original sample

design, and estimating the statistic

of interest using data only from the

subset. This subset estimate is called

a replicate. Other replicates are then

computed by using different, possibly overlapping subsets of the whole

sample. In the cost level program,

64 replicates are generally computed

for each published estimate.

The standard error of a cost-level

estimate is calculated by summing

over the 64 replicates the squared

differences between the replicate

estimates and the estimate for the

entire sample, dividing by 64, and

then taking the square root. These

standard errors are then used to

calculate the standard errors on

changes.

The standard error of the difference in cost levels between 2 years is

calculated using the formula

σ (y96 - y95) = σy96 + σy95 - 2cov (y96, y95)

Once standard errors are calculated, they can be used to construct

“confidence intervals,” which

provide an indication of the reliability of the estimates. The lower

bound of a confidence interval is

constructed by subtracting a multiple

of the standard error from the

published estimate. The upper

bound of a confidence interval is

constructed by adding the same

multiple of the standard error to the

published estimate.

Confidence intervals have the

following properties: Suppose that

samples are repeatedly drawn from

the same population. The data from

each sample are used to compute an

average compensation cost (the

survey estimate) and its estimated

standard error. The confidence

intervals from one standard error

below each sample’s estimate to one

standard error above would include

the value being estimated for

approximately 68 percent of the

samples. That is, we could say with

68-percent confidence that the “true”

value of the measurement, which

could be obtained only from a

complete census of the population,

falls within +/- one standard error of

the sample estimate. Confidence

rises to 95 percent if the intervals

surrounding sample estimates are

widened to +/- two standard errors.

Appendix. Measuring the

Precision of Cost Level

Changes

................................