Occupational Pay Relatives explanatory note

                                      Technical Note

Pay relative controls and calculations

     Pay relatives control for differences among areas in occupational composition as well as
establishment and occupational characteristics.  Metropolitan areas often differ greatly in
the composition of establishments and occupations that are available to the local workforce.
For example, in Brownsville-Harlingen, Texas, the ratio of workers in the typically high-paying
management, business, and financial occupations group to the number of workers in all occupations
is under 6 percent, whereas nationally this ratio is nearly 9 percent.1  In addition to these
factors, the NCS collects compensation data for metropolitan areas at different times during
the year.  Payroll reference dates differ between areas, which makes direct comparisons between
areas difficult.

     The pay relative approach controls for these differences to isolate the geographic effect
on wage determination.  To illustrate the importance of controlling for these effects, consider
the following example.  The average pay for construction and extraction workers in the
New York-Newark-Bridgeport, NY-NJ-CT-PA area is $30.42 and the average pay for construction
and extraction workers in the entire United States is $20.14.2  A simple pay comparison can be
calculated from the ratio of the two average pay levels, multiplied by 100 to express the
comparison as a percentage.  The pay comparison in the example is calculated as:

	($30.42 ÷ $20.14) × 100 ≅ 151

     This comparison does not control for differences between the New York-Newark-Bridgeport,
NY-NJ-CT-PA metropolitan area and the nation in the mix of occupations, industries, and other
factors.  A more accurate estimate of the geographic effect of wages can be obtained by taking
these differences into account.  Controlling for differences in occupational composition,
establishment and occupational characteristics, and the payroll reference date relative to
the nation as the whole, the pay relative for construction and extraction occupations in
New York-Newark-Bridgeport, NY-NJ-CT-PA is equal to 133.

Sampling errors and statistical significance

     Because the NCS is a sample survey, data are subject to sampling error.  For the data
presented here, sampling error are differences that occur between the pay relatives estimated
from the sample and the true pay relatives derived from the population.  It is important to
assess whether differences between each pay relative and the pay relative for the nation as a
whole is likely to be the result of sampling error or of true differences in pay levels.
To perform this assessment, a test of statistical significance is conducted.

     The test constructs a 90-percent confidence interval that assumes the given areas true
pay relative is equal to the national average.  The confidence interval is constructed so that
there is a 90-percent probability the pay relative calculated from any one sample is contained
within the confidence interval.  If from a single sample a calculated pay relative falls within
the confidence interval, then the pay relative is not statistically significant and the
hypothesis that the true pay relative is equal to the national average is accepted.  However, if
the pay relative falls outside of the constructed confidence interval then the pay relative is
statistically significant at the 10-percent level.  The hypothesis that the given areas pay
relative is equal to the pay relative for the nation is rejected and one can conclude with
reasonable confidence that the true pay relative is different from the national average.
Statements involving multiple comparisons in the text, however, such as those using largest or
smallest, could not be validated.

     In addition to sampling error, pay relatives are subject to a variety of sources that can
adversely influence the estimates.  The NCS may be unable to obtain information for some
establishments; there may be difficulties with survey definitions; respondents may be unable to
provide correct information, or mistakes in recording or coding the data may occur.  Non-sampling
errors of these kinds were not specifically measured.  However, they are expected to be minimal
due to the extensive training of the field economists who gathered the survey data, computer
edits of the data, and detailed data review.

Survey methodology

     The National Compensation Survey (NCS) collects earnings and other data on employee
compensation covering over 800 detailed occupations.  Average occupational earnings from the
NCS are published annually for 77 metropolitan areas and for the United States as a whole.
Beginning in 2006, the NCS implemented a number of significant survey changes including
imputing for temporary non-response situations and benchmarking estimated employment.  For
more details on these changes, see the article at http://www.bls.gov/opub/cwc/cm20070122ar01p1.htm.

     The NCS program collects data in U.S. Office of Management and Budget (OMB) defined
geographic areas. The NCS is in its first year of a six-year transition from the June 1993 OMB
area definitions to the December 2003 OMB area definitions.  The area titles have been updated
to reflect the new area definitions; however, the private industry sample is based on the
1993 area definitions.  Area titles are subject to annual OMB revision.  For more information
on the area definitions, see Jason Tehonica, "New Area Sample Selected for the National
Compensation Survey," Compensation and Working Conditions Online, April 25, 2005, on the
Internet at: http://www.bls.gov/opub/cwc/cm20050318ar01p1.htm.

     Historical pay relative data are available for 1992-1996, 1998, 2002, and 2004-2006.
There are several differences between the recent pay relatives and the pay relatives for earlier
years, including different industry and occupation classification systems, varying methodology,
and different survey designs.  These differences limit comparability.  The pay relatives for
2004 through 2007 were calculated using the same industry and occupation classification
systems, methodology, and survey design.  Nonetheless, comparisons between the estimates
for these years should be made only with a high degree of caution.

     Pay relatives were estimated using a multivariate regression technique methodology to
control for interarea differences.  This technique controls for the following ten characteristics:

     - Occupational type
     - Industry type
     - Work level
     - Full-time / part-time status
     - Time / incentive status
     - Union / nonunion status
     - Ownership type
     - Profit / non-profit status
     - Establishment employment
     - Payroll reference date

     Even accounting for the characteristics used in the current regression analysis, there is
still significant wage variation across the areas.  The variation is due to differences in wage
determinants that were not included in the model.  Examples of these determinants include price
levels, environmental amenities such as a pleasant climate, and cultural amenities.

     The pay relative regression methodology introduces another type of error.  Regression models
are subject to specification error.  The significance test does not specifically measure
specification error.  However, care was taken to minimize this form of error by an extensive
search across specifications for the model that performs best in terms of predictive accuracy.

     For more details, see Maury B. Gittleman, "Pay Relatives for Metropolitan Areas in the U.S."
Monthly Labor Review, March 2005, pp. 46-53, and Parastou Karen Shahpoori, "Pay Relatives for
Major Metropolitan Areas," Compensation and Working Conditions, Spring 2003.

Obtaining information

     Articles, bulletins, and other information may be obtained by calling (202) 691-6199,
sending email to NCSinfo@bls.gov, or visiting the Internet site http://www.bls.gov/ncs.
Information in this release will be made available to sensory impaired individuals upon request.
Voice phone: (202) 691-5200; Federal Relay Service Number: 1-800-877-8339.

     1 Data for this example are based on the May 2007 Metropolitan and Nonmetropolitan Area
Occupational Employment and Wage Estimates, http://www.bls.gov/oes/current/oessrcma.htm.

     2 Average pay for construction and extraction workers in the New York - Newark - Bridgeport,
NY-NJ-CT-PA metropolitan area and for the United States are based on wage estimates published
in the New York - Newark - Bridgeport, NY-NJ-CT-PA, National Compensation Survey, May 2007 and
the upcoming National Compensation Survey: Occupational Wages in the United States, July 2007,
located on the Internet at http://www.bls.gov/ncs/ocs/ncswage.htm.

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Last Modified Date: July 25, 2008