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Compensation Inequality

Brooks Pierce


This paper uses Employment Cost Index (ECI) micro data to investigate inequality in compensation rates. The results help fill a gap in our knowledge on this issue, in that currently available data are not as comprehensive as those in the ECI. For example, most public use data lack benefit cost measures.

In the cross-section wage inequality understates compensation inequality. This is largely due to differences in the lower half of the wage distribution. The fraction of compensation taken in the form of wages is much higher at the 10th percentile of the compensation distribution than at the median, implying larger compensation than wage differentials across different distributional points in the lower half of the wage distribution. On the other hand, the compensation and wage differentials between workers at the median and the 90th percentile of the wage distribution are roughly equal to each other. The findings differ substantially depending on what benefits are included in the measure of compensation.

The data also allow one to investigate recent changes in wage and compensation inequality. Compensation inequality growth slightly exceeds wage inequality growth over the 1982-96 period. As with inequality at a point in time, some of the more interesting phenomena occur in jobs with below-median wages. The differences between compensation and wage inequality growth are largely due to declining health insurance coverage in the lower half of the compensation distribution.

The fact that compensation fell more than wages at points lower in the distribution suggests very large percentage drops in benefit costs in that range. For instance, the real costs associated with paid leave at the 10th percentile of the compensation distribution fell by about 50 percent over the 1982-96 period. Costs associated with pensions and health insurance also fell dramatically for low-compensation jobs. The data suggest income effects as a potential contributory factor in the relative decline of fringe benefits at lower points in the compensation distribution.