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Measuring Wage Dispersion: Pay Ranges Reflect Industry Traits

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Measuring Wage Dispersion: Pay Ranges Reflect Industry Traits Measuring wage dispersion: pay ranges reflect industry traits Greatest wage dispersion occurs in industries with broad occupational stafung or with much incentive pay; high paying industries, often heavily unionized, show less variation in earnings and a penchant for single job rates CARL B. BARSKY AND MARTIN E. PERSONICK Wage rates in an industry can vary a great deal above The data reveal substantial differences in the degree and below the average wage for that industry. However, of wage dispersion among various industries, apparently in another industry with a similar average wage, the governed by two competing groups of factors: (1) range of pay rates can be small. What causes such dif- companywide bargaining and single job rates create low ferent wage dispersions among industries? Using meas- wage dispersion in industries such as glass containers ures of relative dispersion, this analysis shows that in- and cigarettes; and (2) broad occupational staffing pat- dustry characteristics such as degree of unionization, terns and incentive pay systems tend to produce large geographic location, occupational mix, and method of wage spreads in industries such as meat products and wage payment influence the amount of variation. Recent men's suits. In general, high-paying industries, often wage data for a cross-section of manufacturing and highly unionized, show less variation in individual earn- mining industries are examined in this article. ings than low-paying industries . Differences in pay lev- The Bureau's Industry Wage Survey program is espe- els among establishments are a dominant characteristic cially suited to analysis of wage dispersion. Individual of industries with widely dispersed earnings. surveys provide straight-time hourly earnings data for a Employee opportunities for increased pay take dif- number of detailed occupations representing an indus- ferent forms that are related to the degree of industry try's wage structure. Information is recorded on each wage dispersion. Uniformity of wages, as found in many establishment's location, collective bargaining status, high-paying industries, might discourage movement of and number of employees, as well as on its major prod- workers between firms (that may pay the same rates set uct and production processes. In addition, sex and by union agreement). However, widely dispersed earn- method of wage payment are recorded for individual ings, often in low-paying industries, may encourage workers. workers to seek increased earnings through shifts to Data for 43 manufacturing and six mining industries higher paying firms or to those using incentive pay sys- surveyed during 1973-78 are used in this analysis .' tems. These narrowly defined industries, although not a prob- In addition to individual workers, others who make ability sample of all industries, adequately represent the decisions based on wage rate distributions include com- many kinds of manufacturing and mining activities in panies who set their wage levels at stipulated distances the United States . from an industry or area-wide average, market research- ers testing the Carl B . Barsky is an economist and Martin E. Personick a project di- potential demand for new consumer rector in the Division of Occupational Wage Structures, Bureau of La- products, and tax analysts estimating revenues from bor Statistics . workers at different earnings levels. 35 MONTHLY LABOR REVIEW April 1981 e Measuring Wage Dispersion devia- Analytical technique workers fall within plus or minus one standard tion of the mean . In this analysis of wage dispersion, two basic for the cen- Before defining the dispersion measures in this analy- approaches are used : the spread in earnings is related to sis, let us look at a full earnings distribution to find tral portion of the industry's distribution dispersion ; and the some of its kcv points. Chart 1 describes the wage dis- the median value by the index of distribution about the tribution in basic steel, which corresponds closely to a variation of all wage rates in the of variation. "bell-shaped" curve; in fact, its mean and median value mean value is summarized by the coefficient by dividing the are exactly the same . Moreover, its first and third quar- The index of dispersion is computed between the third and tiles- the points above and below which a fourth of the interquartile range (the difference quartile) and mul- workers fall - are each about equidistant from the me- first quartiles) by the median (second basic steel, it is dian . The standard deviation can be thought of as the tiplying by 100 . In the case of the distribution of average distance (dispersion) of workers' earnings from $1 .46i$8 .32 X 100 = 18. Obviously, of the array has no the industry's mean . Typically, about two-thirds of the rates at the upper and lower fourth Chart 1 . Distribution of hourly earnings of production workers in basic iron and steel, February 1978 Percent o workers 20 18 16 Mean and median 14 12 10 4 0 60 4 40 5 20 6_00 680 7 I 40 9 2C 0 .00 10 80 1 1 60 1,' 40 Earnings 36 influence on the index values. Further, the actual wage mum wage when the surveys were last conducted . The rates other than the three quartiles do not affect the dis- median-based dispersion index suggests that these in- persion index; this measure is determined only by the dustries have as much relative dispersion as, for exam- position of these quartiles, and not the shape of the dis- ple, meatpacking-an industry which is not influenced tribution within the band. The median standardizes the by the minimum wage and which has one of the highest index of dispersion, so that a distribution of relatively coefficients of variation (29) among those reported . high rates may be compared with one of low rates. For At the other end of the earnings array, the lead and example, if one industry has quartiles of $4 .00, $4 .50, zinc mining industry has some "hidden" dispersion in and .00, $5 and a second has quartiles of $8 .00, $8 .50, the upper one-fourth of its earnings distribution . Min- and $9.00, both would have an interquartile range of ers, primarily paid on an incentive basis, had earnings $1 .00. The indexes of dispersion are 22 for the first in- that were usually scattered throughout that upper por- dustry and 12 in the second, indicating more relative tion. As a result, the industry's dispersion index value dispersion in the lower paying industry . of 18 ranks relatively low (although second highest The coefficient of variation is computed by dividing among the mining segment); but, its coefficient of varia- the standard deviation by the mean and multiplying by tion (26) is among the upper third of those reported. 100. The calculation for basic steel would be $1 .25 Rankings of the coefficients of variation were com- $8.32 100 = X 15. As with the dispersion index, a cen- pared with rankings of such characteristics as industry tral value-the mean-is used to standardize the earn- pay level, unionization, and the use of single-rate pay ings dispersion for situations with varying pay levels. systems . Based on Spearman rank correlation tests, the Most of the analysis in this article relies on the degree of dispersion is inversely related to these factors .' coefficient of variation as a measure of dispersion. Us- Table 2 portrays the inverse relationship found be- ing either the dispersion index or the coefficient of vari- tween dispersion and pay levels for 28 industries. Only ation, however, will generally result in similar con- the meatpacking and motor vehicle parts industries clusions when comparing wage dispersion among in- were in the top third of rankings of both industry pay dustries or other economic units.z (See "technical note" levels and dispersion, and none of the industries fell that follows for a comparison of how the two measures into the bottom third of both categories. Consistent may differ .) The primary advantage of the coefficient of with the Spearman test, a clustering occurred for indus- variation approach is that total variation in earnings tries with the highest pay levels and the lowest coeffi- around the mean can be measured and then, broken cients of variation. into two component parts-earnings variations among Industries with low dispersion rates were, as and within establishments . expected, highly unionized . There were, however, other highly unionized industries with broadly Ranking wage spreads dispersed earn- ings-such as men's suits, leather tanning, and gray Two sets of dispersion rates by industry are shown in iron (except pipe and fittings) foundries . The latter in- table 1 . Indexes of dispersion were, with few exceptions, dustries had substantial proportions of workers under higher than coefficients of variation, but both measures incentive pay plans. Four industries with coefficients of yielded similar rankings of industries based on Spear- variation of 10 or less (underground coal, iron and cop- man tests.' Industries with the least degree of earnings per mining, and petroleum refining), in addition to be- variation included motor vehicle manufacturing, several ing virtually 100 percent unionized, were marked by mining groups, petroleum refining, and cellulosic fibers. almost complete mechanization of production processes The most dispersed earnings were reported in semicon- and, therefore, a virtual absence of worker control over ductors and men's suit and coat manufacturing . output . As a result, time rates are paid almost exclus- In certain instances, the two dispersion measures ively in these industries, producing low wage dispersion . were dissimilar in rank or value. The coefficients of vari- Industries with high dispersion rates were invariably ation for the women's hosiery and men's and boy's those using pay plans other than single-rate systems. shirts industries, for example, were 21 and 22, respec- Men's suits, with the second highest coefficient of varia- tively, indicating a moderate amount of dispersion .
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