Academic journal article Monthly Labor Review

Pay Relatives for Metropolitan Areas in the NCS: Using Data from the National Compensation Survey, Calculations of Pay Which Take into Account the Composition of Employment across Localities Indicate That Measures of Interarea Pay Differentials Which Do Not Control for Employment Composition Can Be Misleading

Academic journal article Monthly Labor Review

Pay Relatives for Metropolitan Areas in the NCS: Using Data from the National Compensation Survey, Calculations of Pay Which Take into Account the Composition of Employment across Localities Indicate That Measures of Interarea Pay Differentials Which Do Not Control for Employment Composition Can Be Misleading

Article excerpt

When workers and firms make decisions on where to locate, a number of factors come into play. One important consideration is how compensation differs across areas. Workers will tend to be attracted to cities where the compensation is higher, provided, of course, that the benefits of more generous pay are not completely offset by a steeper cost of living or by undesirable characteristics of the better paying city, such as higher levels of crime and pollution or an inferior climate. Firms, by contrast, have an incentive to relocate to cities in which labor is cheaper, all else being equal. Besides being an input for location decisions, information on interarea variation in compensation is relevant to a host of other purposes, including wage and salary administration, collective bargaining, and the analysis of any number of economic issues wherein geography is a consideration.

Under its National Compensation Survey (NCS) program, the Bureau of Labor Statistics regularly publishes data on wage levels in metropolitan areas. (1) Large differences across areas are evident in mean hourly earnings for the local economies as a whole. (2) While these data provide valuable information for many purposes, they are not generally appropriate for cases in which the data user wishes to know how compensation differs among areas for any given job. Metropolitan areas vary greatly in terms of the types of jobs that are available to the local labor force, with one area having, say, a high concentration of professional workers, while another has an above-average share of blue-collar employment. Thus, one cannot tell from an examination of overall mean wage rates whether one metropolitan area pays better than another because it tends to have higher pay for any given job or because jobs in that area are more concentrated among positions that tend to have higher rates of pay in all localities. A second, more technical, reason comparisons of overall mean levels may be somewhat misleading is that, even for surveys from the same year, areas will differ from each other in terms of when the data were collected. Thus, one area may have wage data referring primarily to the beginning of the year, another to the end of the year, when wages everywhere will tend to be higher because of inflation and other secular trends.

This article presents calculations of the pay in metropolitan areas relative to that in the Nation as a whole which take account of both interarea differences in the composition of jobs and the fact that surveys occur at different times of the year. Pay relatives are presented for all jobs that are covered by the survey and by nine major occupation groups.

Why do wages differ across areas?

Before, presenting the methods employed to produce these pay relatives, it is useful to discuss briefly why wages differ across areas in the first place. (3) As just noted, pay may differ because the composition of jobs differs from city to city. But, as will be demonstrated subsequently, even after taking account of interarea differences in employment composition, one still finds much variation in wages across localities. In simple models of interarea wages, economic theory suggests that wage rates should adjust so that individuals will be indifferent between living in one location as opposed to another. This adjustment does not mean, however, that wages themselves will be identical across areas, even in the simplest models. Areas differ in price levels, so if, for instance, the price of housing is particularly high in one area, workers would need higher wage rates to be willing to live in that area. Besides differing in price levels, cities vary in the amenities they offer. Thus, if an area is particularly attractive because of a desirable climate, a rich cultural life, or low levels of crime, then, all else being equal, wages will not have to be as high for that area to attract and maintain a workforce. Similar considerations apply to firms. …

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