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Wage Inflation in the ECI and Across‐Group Inequality

Michael K. Lettau


Many authors document a widening of the wage distribution in the United States over the last 25 years, especially during the 1980's. In measuring inequality, authors divide the dispersion of wage rates between within-group and across-group variation. In the 1980's, the across-group variation increased, augmenting an overall increase in the variance of wages. That is, average wage rates among the groups diverged during that period.

Average wage rates provide one measure of wage inflation over time. However, the Bureau of Labor Statistics developed the Employment Cost Index (ECI) in response to requests for a purer measure of wage inflation, one that is free from changes in the composition of jobs over time. Other wage series provide little or no control for shifts in the mix of workers in the labor market. By tracking a sample of jobs over three-month periods, the ECI reflects more accurately how much a firm expects to raise its compensation to retain its labor input.

Besides the index for all workers, the BLS reports subindices for industry and occupation groups. Although the ECI is a unique measure, the variation among its subindices relates quite naturally to estimates of across-group wage variation from the inequality literature. The paper therefore compares wage inflation in the ECI with average wage rates in the Current Population Survey (CPS) for industry and occupation groups.

For the 1980's, the change in a group's average wage rate in the CPS correlates closely with its wage inflation in the ECI. Thus, for those years, across-group variation from the CPS accurately portrays wage inflation incurred by employers. More recently, however, when the trend in across-group variation has been less dramatic, wage inflation from the ECI has not differed significantly among the groups, even though the CPS has continued to show significant variation. Moreover, to the extent that inflation rates in the ECI have differed among the groups, their differences do not particularly align with the change in average wage rates from the CPS.