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New Estimates for Wage Rate Inequality Using the Employment Cost Index Michael K. Lettau a b s t r a c t The Employment Cost Index measures the change in wage rates for a Žxed set of jobs over time. The separate indices for industry and occupa- tion groups grew at varying rates during the 1980s. However, their growth rates have been much more similar since then, which implies that the increase in the wage rates of low-wage workers relative to middle- wage workers during the 1990s was due to changes in the mix of jobs. Had all workers remained in their jobs, the relative wage of low-wage to middle-wage workers would have remained constant.

I. Introduction

Many authors document a widening of the wage distribution in the United States over the last 25 years, especially during the 1980s. 1 These studies typically use household surveys as their data source, such as the decennial Census or the Current Population Survey CPS. Wage rates in these data sets uctuate for many reasons: Workers move in and out of the labor force, workers change their Michael K. Lettau is an economist with the U.S. Bureau of Labor Statistics. He thanks an anonymous referee and members of the Compensation Research and Program Development Group and the OfŽce of Employment Research and Program Development of the U.S. Bureau of Labor Statistics for their comments. The views expressed in this paper are those of the author and do not necessarily reect the view of the Bureau of Labor Statistics or any of its staff. The publicly available data used in this arti- cle can be obtained beginning April 2004 through March 2007 from Michael Lettau, U.S. Bureau of Labor Statistics, 2 Massachusetts Ave. NE, Washington, DC 20212. The author can provide advice on the application process for the conŽdential data used in this article. Application details can be ob- tained by contacting the OfŽce of the Commissioner at the same address. [Submitted March 1999; accepted May 2002] ISSN 022-166X Ó 2003 by the Board of Regents of the University of Wisconsin System 1. For example, see Bound and Johnson 1992, Levy and Murnane 1992, Katz and Autor 1999, and Pierce 2001. T H E J O U R N A L O F H U M A N R E S O U R C E S • X X X V I I I • 4 Žrms, workers are promoted within the same Žrm, and wages grow at different rates for workers remaining in their jobs. Trends in wage rates over time are an amalgam of these dynamics. Acknowledging the need for an alternative, the Bureau of Labor Statistics devel- oped the Employment Cost Index ECI in the 1970s. By following a panel of jobs over three-month periods, the ECI would focus more narrowly on how much a Žrm must raise compensation to retain its labor input. It would be unaffected by shifts in the mix of jobs in the labor market. 2 Indeed, since its inception, the Employment Cost Indices for all civilian workers has generally grown at a different rate than the averages from other wage series. 3 The broad indices for all workers are watched most closely, but the ECI program also reports several subindices, notably for industry and occupations groups. This paper compares the ECI’s wage growth for these groups with average wage rates for the same groups in the CPS. If their growth rates are similar, trends in average wage rates are not just an artifact of workers moving into the labor force and upgrad- ing their jobs. They represent differential wage increases for workers who remain in their jobs. Viewed from the Žrm’s perspective, they represent the different cost increases employers must absorb to retain the different groups of workers. On the other hand, if the variation in the ECI over time does not match the trends among average wage rates in the CPS, the variation among industryoccupation groups re- sults from the upgrading of jobs alone, not any differential adjustment to compensa- tion within jobs. After a comparison of their growth rates, the ECI and CPS estimates are combined to create a hypothetical wage distribution. This distribution shows what wage rates would have been had workers remained in stable job situations, in contrast to the CPS, which is inuenced by all dynamics of the labor market. Summary measures of wage dispersion are calculated for both distributions. The results are the following. During the 1980s, the variation in wage growth among industryoccupation groups in the ECI was quite similar to the corresponding change in average wage rates in the CPS. Since then, however, the ECI has shown little systematic variation in wage growth among the groups. This translates into a different pattern of wage dispersion between the CPS and the hypothetical distribu- tion. In the CPS, the wage rates of low-wage workers fell relative to the middle workers during the early to middle 1980s, but they have increased since then. The hypothetical distribution shows the same pattern for the 1980s, but a more stable ratio between low- and middle-wage workers since then. Thus, the gains low-wage workers have made in the more recent years were due to the creation and movement of workers between jobs, not the more passive circumstance of higher wage increases for low-wage workers remaining in their job. 2. Another way to understand the ECI as a distinct measure of wage movement is to consider the Job Quality Index JQI, which the Center for National Policy reports every three months. Frumkin 2000 describes the JQI as the obverse of the ECI. The JQI measures changes in wage rates due solely to shifts in the types of jobs held by workers. It is not affected by changes to compensation within jobs. Conceptually then, movement in the ECI is a subset of movement in average wage rates, with movement in the JQI as its complement. 3. See Lettau, Loewenstein, and Cushner 1997b and results below.

II. Empirical SpeciŽcation