Brooks Pierce (1999) "Compensation Inequality."
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.
Last Modified Date: July 19, 2008