A new measure of the cost of compensation components

Survey of Current Business, Nov, 1988 by G. Donald Wood

A New Measure of the Cost of Compensation Components

THIS paper describes and evaluates a new measure of employer costs--that is, cents per hour measures--for the components of employee compensation. The new measure is estimated from data collected for the Employment Cost Index (ECI), which has provided, since 1980, index numbers of the change in compensation costs. It was decided to use ECI data to prepare cost-level estimates, since these estimates could be generated from the ECI without increasing in any way the reporting burden on establishments and at only a fraction of the cost of a separate survey.

The first cost-level estimates, for March 1987, were published in the October 1987 Monthly Labor Review and are presented in tables 1-5 (Nathan 1987). Beginning this year, cost estimates with a March reference date will be published annually by the Bureau of Labor Statistics in a news release issued in June.

Data collected for one purpose are rarely ideal for other purposes, and cost-level estimates from the ECI are no exception. However, evidence presented in this paper indicates that these estimates are very reliable.

Summary of Results

In March 1987, compensation for all private industry workers averaged $13.42 per hour worked. Wages were $9.83, or 73.2 percent of total compensation. Benefit costs were $3.60, or 26.8 percent of total compensation. The largest component of benefits was legally required benefits, which was dominated by social security costs and which accounted for 32 percent of benefit costs. Other major components of benefits are paid leave (26 percent), insurance (20 percent), retirement benefits (13 percent), and supplemental pay (9 percent).

There is considerable variation in levels of compensation and proportions of benefits to compensation among the broad industrial and occupational groups for which estimates are available. White-collar workers received $15.56 an hour, which is 16 percent more than the $13.43 received by blue-collar workers. The highest paid white-collar occupational group is composed of executive, administrative, and managerial workers who received $23.81 per hour worked, which is 3.7 times the pay of workers in the lowest paid occupational group--service workers--who received $6.43 per hour.

Workers in the goods-producing sector received $15.86 an hour, which is 28 percent more than the $12.41 received by workers in the service-producing sector. Workers in the highest paid industry--transportation and public utilities--received $20.24 an hour, which is 2.6 times the pay of workers in the lowest paid industry--retail trade--who received $7.85 an hour.

The proportion of total compensation that is accounted for by wages decreases as the level of compensation by industry increases. Wages and salaries as a proportion of total compensation ranged from 77.3 percent for retail trade to 68 percent for transportation and public utilities. This inverse relationship between the level of compensation and the proportion accounted for by wages should be expected. Most benefits have a high income elasticity of demand, and social security has become less regressive, because the 1987 earnings ceiling of $45,000 is well above most annual wage and salary incomes.

However, for any level of compensation, blue-collar workers tend to have a lower proportion of total compensation accounted for by wages than do white-collar workers, even though blue-collar workers earn less. Wages and salaries for white-collar workers average $11.61, and wages and salaries for blue-collar workers average $9.38. Benefit costs for blue-collar workers of $4.05, however, are slightly higher than the benefit costs of $3.95 for white-collar workers.

Even when blue-collar and white-collar worker groups are considered separately, the expected inverse relationship between the level of compensation and the proportion of compensation accounted for by wages and salaries does not appear. Wages account for 70.6 percent of total compensation for the lowest paid blue-collar group--laborers--and 70.8 percent for the highest paid blue-collar group--precision workers. Wages account for 72.3 percent for the lowest paid white-collar group--clerical workers--and 75 percent for the highest paid white-collar group--executive, administrative, and managerial workers.

There are a number of other relationships to be found among the data in the tables; some of these are expected, and some are perplexing. But the purpose of this paper is not to analyze the data; instead, it is to provide information to aid potential users in properly interpreting and analyzing these new data from the ECI program.

ECI Survey Design

The 1987 cost-level estimates were based on data collected from about 3,200 establishments in the price nonfarm sector of the economy. The establishments were selected with probability proportional to employment from the Bureau of Labor Statistics (BLS) Unemployment Insurance (UI) File. The file lists every establishment with one employee or more covered by State unemployment insurance. About 98 percent of all private industry workers are employed by establishments listed in the file.