Employment Cost Index technical note

                                        TECHNICAL NOTE

     The Employment Cost Index (ECI) is a measure of the change in the cost of labor, free from
the influence of employment shifts among occupations and industries.  The compensation series
includes changes in wages and salaries and employer costs for employee benefits.  The wage and
salary series and the benefit cost series provide the changes for the two components of

     Wages and salaries are defined as the hourly straight-time wage rate or, for workers not
paid on an hourly basis, straight-time earnings divided by the corresponding hours.  Straight-time
wage and salary rates are total earnings before payroll deductions, excluding premium pay for
overtime and for work on weekends and holidays, shift differentials, and nonproduction
bonuses[S1].  Production bonuses, incentive earnings, commission payments, and cost-of-living
adjustments are included in straight-time wage and salary rates.

     Benefits covered by the ECI are:  Paid leave--vacations, holidays, sick leave, and personal
leave; supplemental pay--premium pay for work in addition to the regular work schedule (such
as overtime, weekends, and holidays), shift differentials, and nonproduction bonuses (such as
year-end, referral, and attendance bonuses); insurance benefits--life, health, short-term
disability, and long-term disability; retirement and savings benefits--defined benefit and
defined contribution plans; and legally required benefits--Social Security, Medicare, federal
and state unemployment insurance, and workers compensation.

     The ECI provides data for the civilian economy, which includes the total private nonfarm
economy excluding private households, and the public sector excluding the federal government.
The private industry series and the state and local government series provide data for the
two sectors separately.

     Sample establishments are classified by industry categories based on the 2007 North
American Industry Classification System (NAICS).  Prior to December 2007, the 2002 NAICS
classification system was used.  Differences between the two NAICS systems did not affect any
of the published ECI series.  All industries are classified into two sectors--goods-producing
and service-providing.  Within a sample establishment, specific job categories are selected
and classified into about 800 occupational classifications according to the 2000 Standard
Occupational Classification (SOC) system.  Individual occupations are combined to represent one
of ten intermediate aggregations, such as professional and related occupations, or one of five
higher-level aggregations such as management, professional, and related occupations.  Both
the NAICS and the SOC classification systems are defined by the U.S. Office of Management and
Budget (OMB).  For more detailed information on NAICS and SOC, including background definitions,
see the BLS Web sites:  www.bls.gov/bls/naics.htm and www.bls.gov/soc/home.htm.

     To be included in the ECI, employees in occupations must receive cash payments from the
establishment for services performed and the establishment must pay the employers portion of
Medicare taxes on that individuals wages.  Major exclusions from the survey are the
self-employed, individuals who set their own pay (for example, proprietors, owners, major
stockholders, and partners in unincorporated firms), volunteers, unpaid workers, family
members being paid token wages, individuals receiving long-term disability compensation,
and U.S. citizens working overseas.

     Data for the June 2008 quarter were collected from a probability sample of approximately
56,500 occupational observations selected from a sample of about 12,100 establishments in
private industry and approximately 11,800 occupations from a sample of about 1,900 establishments
in state and local governments.  The state and local government sample, which is replaced less
frequently than the private industry sample, was replaced in its entirety in September 2007.
As a result of this replacement, the number of state and local government occupations and
establishments increased substantially.  The private industry sample is rotated over
approximately 5 years, which makes the sample more representative of the economy and reduces
respondent burden.  Data are collected for the pay period including the 12th day of the survey
months of March, June, September, and December.  The sample is replaced on a cross-area,
cross-industry basis.

     Fixed employment weights are used each quarter to calculate the most aggregate
series--civilian, private, and state and local government.  These fixed weights are also
used to derive all of the industry and occupational series indexes.  Beginning with March 2006
estimates, 2002 fixed employment weights from the Bureaus Occupational Employment Statistics
survey were introduced.

     For the series based on bargaining status, census region and division, metropolitan area
status, and for series excluding incentive paid occupations, fixed employment data are not
available.  The employment weights are reallocated within these series each quarter based on
the current ECI sample.  The nursing care facilities indexes in private industry are estimated
using fixed-employment weights derived from staffing patterns estimated from the four-digit
industry NAICS group 6231, nursing care facilities, a sub-industry of the larger industry
group, nursing and residential care facilities (NAICS 623).  The indexes for these series,
consequently, are not strictly comparable with those for the aggregate, occupational, and
industry series.  A fuller explanation of the calculation of index numbers appears in chapter
8 of the BLS Handbook of Methods, at the web site www.bls.gov/opub/hom/pdf/homch8.pdf.

     Beginning with the release of the March 2006 data, indexes were rebased to December 2005=100
from June 1989=100.  The percentage changes shown in the current- and constant-dollar historical
tables were calculated from the rebased indexes.  Thus, changes may differ from those originally
published because of rounding.

     The ECI state and local government sample consists of 152 areas that represent the
Nation's 361 metropolitan statistical areas and 573 micropolitan statistical areas as defined
by OMB in December 2003 and the remaining portions of the 50 states.  The ECI private industry
sample consists of 151 metropolitan areas and nonmetropolitan areas that represent the Nation's
326 metropolitan statistical areas as defined by OMB in 1994 and the remaining portions of
the 50 states.  Metropolitan areas are defined as Metropolitan Statistical Areas (MSAs) or
Consolidated Metropolitan Statistical Areas (CMSAs).  Nonmetropolitan areas are counties and
other geographic designations that do not fit the metropolitan area definition.  The private
industry estimates will begin the conversion to December 2003 OMB areas definitions in
December 2008.

     Seasonally adjusted data for selected ECI series began with the December 1990 ECI release.
Seasonal adjustment removes the effects of events that follow a more or less regular pattern
each year.  These adjustments make nonseasonal patterns easier to identify.  The seasonal
adjustment factors are recalculated once per year.  The March release contains data reflecting
the newly updated seasonal adjustment factors.  The historical data for the last five years
are then revised based on the newly estimated factors.  The seasonal factors for 2008 and
revised seasonally adjusted indexes for the past 5 years are available at
www.bls.gov/ect/ectsfact.htm or upon request.  Several new seasonally adjusted indexes
and 3-month percent changes of occupational series were added this quarter, with historical
data available beginning with March 2003.

     Because the ECI is a sample survey, it is subject to sampling errors.  Sampling errors are
differences that occur between the results computed from a sample of observations and those
computed from all observations in the population.  The estimates derived from different samples
selected using the same sample design may differ from one other.  A measure of the variation
among these differing estimates is the standard error.  It can be used to measure the precision
with which an estimate from a particular sample approximates the expected result of al
l possible samples.  The chances are about 68 out of 100 that an estimate from the survey
differs from a complete population figure by less than the standard error.  The chances are
about 90 out of 100 that this difference would be less than 1.6 times the standard error.  The
statements of comparisons appearing in this publication are significant at a 1.6 standard
error level or better, unless otherwise indicated.  This means that for differences cited, the
estimated difference is greater than 1.6 times the standard error of the difference.

     The ECI uses standard errors to evaluate published series.  To assist users in ascertaining
the reliability of series, the standard errors for all estimates (excluding seasonally adjusted
series) are available on the BLS Web site at www.bls.gov/ect/ectvar.htm shortly after the
publication of the news release.

     When determining data to be used in contract negotiations, it is important to note that
differences by bargaining status may be due to factors other than union status, such as
occupational and industry mix.  An important consideration when choosing a series for escalation
is the sampling error.  For more information, see www.bls.gov/ect/escalator.htm.

     More detailed information on the ECI is available from several sources.  These include a
chapter, "National compensation measures," (www.bls.gov/opub/hom/pdf/homch8.pdf) from the
BLS Handbook of Methods, and several articles published in the Monthly Labor Review and
Compensation and Working Conditions.  The articles and other descriptive pieces are available
at www.bls.gov/ect/#publications, by calling (202) 691-6199, or sending e-mail to NCSinfo@bls.gov.

     Historical ECI data, using industry categories based on the Standard Industrial
Classification (SIC) System and classifying jobs into occupational classifications according
to the Census of Population, are available dating from the first publication of each series
to December 2005 at:  www.bls.gov/web/echistry.pdf.  Data are also available for series
based on the 2002 and 2007 North American Industry Classification Systems (NAICS) and the
2000 Standard Occupational Classification (SOC) beginning in March 2001, using December 2005=100
as the base period at:  www.bls.gov/web/echistrynaics.pdf.

     In addition, constant-dollar ECI series derived from the Consumer Price Index for All Urban
Consumers (CPI-U) are available.  The constant-dollar series are calculated by converting the
CPI-U to the same base as the ECI.  The ECI for each quarter is then divided by the converted
CPI-U for the same reference period.  The CPI-U U.S. City Average All Items is used to
compute all series except for the regional estimates, which use corresponding CPI regional

     Supplemental data from the ECI, providing 12-month percent changes in employer costs for
health insurance in private industry, are also available at www.bls.gov/ect/sp/echealth.pdf.

     The costs per hour worked of compensation components, based on data from the ECI, are
published in a separate news release titled "Employer Costs for Employee Compensation" (ECEC).
The next ECEC release is scheduled for 10:00 AM EDT, Wednesday, September 10, 2008.
Historical ECEC data are available in summary documents.  Both the release and historical
data are available at www.bls.gov/ect, by email to NCSinfo@bls.gov, or by calling
(202) 691-6199.  Since the ECEC is calculated with current employment weights rather
than the fixed weights used in computing the ECI, year-to-year changes in the cost levels
usually differ from those in the ECI.

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Last Modified Date: July 31, 2008