The Employment Cost Index: What Is It? Understanding the Characteristics of the Employment Cost Index Aids in Identifying the Cost Pressures Measured by This Important Government Statistic --Pressures That Often Lead to Inflation in the Price of Goods and Services. (the Employment Cost Index)

By Ruser, John W. | Monthly Labor Review, September 2001 | Go to article overview

The Employment Cost Index: What Is It? Understanding the Characteristics of the Employment Cost Index Aids in Identifying the Cost Pressures Measured by This Important Government Statistic --Pressures That Often Lead to Inflation in the Price of Goods and Services. (the Employment Cost Index)


Ruser, John W., Monthly Labor Review


The Employment Cost Index (ECI) is a quarterly measure of the change in the price of labor, defined as compensation per employee hour worked. Closely watched by many economists, the ECI is an indicator of cost pressures within companies that could lead to price inflation for finished goods and services. The index measures changes in the cost of compensation not only for wages and salaries, but also for an extensive list of benefits. As a fixed-weight, or Laspeyres, index, the ECI controls for changes occurring over time in the industrial-occupational composition of employment.

This article provides a broad overview of the ECI. Beginning with how the data for the index are collected and how the index is calculated, the discussion draws attention to some of the underlying challenges that are involved in calculating such a complex statistic: What types of data should, ideally, be collected? What data are collected under nonideal conditions? and How are infrequent payments handled? Then, the article addresses a variety of questions that have been raised about the behavior and efficacy of the ECI: How does the index behave over the business cycle? Is it, like the Consumer Price Index (CPI), affected by "substitution bias"? Does the ECI capture emerging forms of compensation, such as hiring and retention bonuses and stock options? and, finally, How does employer cost relate to employee value?

Collection of ECI data

The ECI is computed from compensation cost data collected from a sample of jobs within sampled business establishments and government operations. (In what follows, business establishments and government operations will collectively be called "establishments.") The data are weighted to represent the universe of establishments and occupations in the nonfarm private sector and in State and local governments. The ECI sample, and hence the estimates derived from it, exclude Federal, private-household, and unpaid family workers, as well as self-employed individuals and owners of establishments.

The ECI sample is currently drawn in three stages as part of the larger National Compensation Survey. First, sample geographic areas are selected by dividing the United States into primary sampling units. (1) Second, a sample of business establishments and State and local government operations is selected from within each primary sampling unit that is chosen. Third, a BLS data collector visits each establishment in the sample (the first visit is termed "initiation"), asks for a list of employees, and then collects a sample from this list, using predetermined rules. The employees making up the sample represent jobs that enter into calculations of the ECI. Techniques in which the probability of being selected for the sample is proportional to size are used at all stages of sampling, which means that larger geographic areas, larger establishments, and jobs with more employees have a higher probability of appearing in the survey. However, smaller areas, establishments, and jobs appear as well. For a fixed sample size, variances of estimates tend to be smaller under this kind of sampling than under simple random sampling.

Establishments and jobs within them remain in the ECI sample for approximately 5 years, contributing data every quarter for the pay period that includes the 12th day of the survey months: March, June, September, and December. (2) Data on the cost of compensation are collected for all employees in sampled jobs. After the initial personal visit, quarterly reports are normally collected by mail or telephone by economists located in BLS regional offices. During the time a job remains in the ECI sample, data are collected on all incumbents in the job, even through changes in incumbency. Because the ECI does not follow changes in compensation costs for individual workers, the average wage and salary of a job may vary over time as the composition of incumbents varies (for example, when the tenure of incumbents changes with the business cycle). …

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