Analyzing employers' costs for wages, salaries, and benefits Employment Cost Index data now provide a breakdown of hourly costs incurred; in March 1987, employee benefits accounted for more than one fourth of compensation in private industry FELICIA NATHAN Employee compensation in private industry cost employers This article presents cost estimates for the components of $13 .42 per hour worked in March 1987 . Straight-time compensation for private industry workers, I by industry di- wages and salaries-73 .2 percent of the costs-averaged vision and occupational group . In addition, relative errors $9.83, while benefit costs-the remaining 26 .8 percent- associated with the estimates and costs as a percent of total averaged $3.60 . compensation are shown . This article also discusses high- These costs are based on data from the Bureau of Labor lights of the compensation cost estimates, illustrates how the Statistics Employment Cost Index (ECI) which measures estimates were calculated, and briefly explains the standard quarterly changes in employer costs for employee compen- errors associated with the estimates. sation . The ECI is a fixed-weight Laspeyres index that uses 1980 census employment counts as weights . Data collected Compensation costs for the ECI can be used to derive compensation cost levels at During the post-World War II era, employee benefits no additional burden on survey respondents, but current have become an important part of labor costs and worker employment weights are required . The BLS Current Employ- income . Today, slightly more than one-fourth of employee ment Statistics survey in combination with the ECI sample compensation is in some form of benefit. The largest cate- provide the current weights. gory is legally required benefits, which accounts for 8 .4 The SCI's establishment sample has been recently ex- percent of total compensation costs . (See chart 1 .) These panded, making it possible to produce estimates of compen- legally required benefits include Social Security, workers' sation cost levels that are sufficiently reliable for analysis compensation, and unemployment insurance as well as and publication. The Bureau plans to publish compensation other less common benefits, such as railroad retirement and cost estimates from the ECI sample annually, using March as State temporary disability benefits. Employer costs for le- the reference period . The estimates will be available in gally required benefits averaged $1 .13 per hour worked in midsummer. March 1987-nearly a third of all benefit costs . Lump-sum payments, provided in lieu of wage increases Felicia Nathan is an economist in the Division of Employment Cost Trends, or to offset wage decreases, are becoming more widespread, Bureau of Labor Statistics . particularly in collective bargaining agreements . Neverthe- MONTHLY LABOR REVIEW October 1987 " Analyzing Employers' Compensation Costs utilities ($20.24 per hour worked) and wholesale trade ($15 .15), and lowest in service industries ($12.34) and re- Glossary tail trade ($7.85) . (See chart 2.) Following are definitions of the compensation components As noted previously, wages and salaries alone make up covered by the Employment Cost Index. the major portion of compensation costs in all industries . However, the wage and salary proportion of compensation Wages and salaries : costs was less in relatively high-paid industries than in other The hourly straight-time wage rate, or, for workers not paid on an hourly basis, earnings divided by corresponding industries . Wages and salaries made up 68 percent of total hours . Wages and salaries include production bonuses, in- compensation costs for workers in transportation and public centive earnings, commission payments, and cost-of-living utilities, compared with 74 .2 percent in wholesale trade, adjustments, but exclude supplemental pay. 75 .7 percent in service industries, and 77 .3 percent in retail trade . 3 Benefits : Paid leave-Paid vacations, paid holidays, paid sick leave, Industries also differ in the cost and relative importance and other paid leave. of the various benefits. Benefit costs are related, in part, to wages and salaries because the costs for a number of bene- Supplemental pay-premium pay for overtime and work on weekends and holidays, shift differentials, nonproduction fits (paid leave and Social Security, for example), are tied bonuses, and lump-sum payments . to wage rates or earnings . But other factors are also impor- tant in explaining the industry-to-industry differences. Insurance benefits-life, health, and sickness and accident effects of some other factors, consider insurance . To illustrate the paid leave. This benefit is typically paid at the employee's benefits-pension and other retire- Retirement and savings wage or salary rate, but its cost is influenced by the amount ment plans, and savings and thrift plans. and type of leave granted. Differences among industries in Legally required benefits-Social Security, railroad retire- the amount of paid leave reflect variation in paid leave supplemental retirement, railroad unemployment ment and plans, in employees' length of service with the company, insurance, Federal and State unemployment insurance, full- and part-time workers. workers' compensation, and other benefits required by law, and in the mix of such as State temporary disability insurance . The following tabulation compares average wage and salary rates and paid leave costs per hour worked in selected Other benefits-Severance pay, supplemental unemploy- ment plans, and merchandise discounts in department industries, March 1987: stores . Paid leave Wages As a percent and of wages and salaries Cost salaries Private industry . $ 9.83 $0.93 9.5 less, they still account for a very small part of total com- pensation. These payments are included in the supplemental Goods-producing . 11 .12 1 .09 9.8 Manufacturing . 10 .77 1 .21 11 .2 pay category, which averaged less than 3 percent of em- Service-producing . 9.29 .87 9.4 ployer compensation costs . Transportation and Wages and salaries plus benefits that are paid in cash to public utilities . 13 .77 1 .75 12.7 the employee (paid leave and supplemental pay) accounted Wholesale trade . 11 .24 1 .05 9.3 for 82.5 percent of total compensation costs per hour Retail trade . 6.07 .37 6.1 Service . 9.34 .91 9.7 worked. The remaining 17 .5 percent of employer costs was made up of noncash benefits purchased for the employee . These noncash benefits include insurance, pensions and sav- Also, there is a striking variation among industries in ings, legally required and other benefits, such as supple- employer costs for providing employees with insurance mental unemployment plans and merchandise discounts in (life, health, and sickness and accident)-a benefit domi- department stores. nated by health insurance with costs usually not tied to wages and salaries . This variation reflects differences in the By industry division. Hourly employer compensation types and extent of insurance benefits provided, as well as costs were, on average, higher in goods-producing indus- differences in employee contributions to insurance, and the tries ($15 .86) than in service-producing industries proportion of workers covered. Even though an employer's ($12.41) .2 However, within the service-producing sector, health insurance costs for a plan are about the same regard- there was substantial variation in compensation costs. less of the employee's pay level, there is a positive relation- Among the service-producing industries for which data were ship across industries between the costs of insurance and the published, costs were highest in transportation and public wage and salary rate. This relationship is illustrated in the following tabulation portion of total compensation, benefit costs for service which shows average wage and salary rates and employer workers (22 .8 percent) were less than those for either white- insurance costs per hour worked in selected industries, collar workers (25 .4 percent) or blue-collar workers (30 .2 March 1987 : percent) . Insurance costs per hour worked for service work- ers (27 cents) were about a third of those for white-collar Wages and Insurance salaries cost workers (77 cents) and blue-collar workers (87 cents). Differences among occupational categories in employer Private industry . $ 9 .83 $0 .72 costs for some benefits are related to the work performed . Transportation and The following tabulation shows costs per hour worked for public utilities . 13 .77 1 .32 selected benefits, by occupation, March 1987 : Wholesale trade . 11 .24 .80 Manufacturing . 10 .77 1 .06 W hite-collar Blue-collar Service Service . 9 .34 53 Retail trade . 6 .07 .35 Workers' compensation . $0.11 $0.39 $0.16 State unemployment . .11 15 .10 By occupational group. Employer compensation costs Premium pay . .08 .34 .04 Shift pay . .03 .06 .02 also varied substantially by occupational group, being highest for managers and lowest for service workers . a (See The costs of workers' compensation, State unemployment chart 2 .) Compensation costs per hour worked averaged insurance, premium pay, and shift differentials were higher more for white-collar workers ($15 .56) than for blue-collar for blue-collar workers than for either white-collar or serv- workers ($13 .43), with wages and salaries accounting for ice workers. On average, occupational injury and unem- the difference . Wages and salaries for white-collar workers ployment rates are higher for blue-collar workers, exerting ($11 .61