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Copyright 1998 by the Wyoming Department of Employment, Research & Planning

An Analysis of Covered Employment and Wages Payroll Data

by: Tom Gallagher
Tables by: Nancy L. Brennan

Employment growth in Wyoming during 1997 was a modest 1.5 percent (3,113 Unemployment Insurance--UI--covered jobs, see Glossary) compared to the decade as a whole, which averaged 2 percent per year. But total payroll grew 5.9 percent ($287,374,647) from 1996 to 1997, driving the average wage up 4.4 percent to $459 per week. Analysis of Covered Employment and Wages (ES-202) data for the fourth quarter of 1997 suggests that payroll growth, however, has been concentrated in a small share of the state’s firms. Most employees worked in firms with more modest earnings growth. These findings challenge the straightforward statistical use of payroll data as a measure of either demand in the labor market or likely consumption.

Workers in firms in the fourth quarter of 1997 (97Q4) and 1996 (96Q4), and in the third quarter of 1997 (97Q3), earned an average weekly wage (AWW) of $491 (see Table 1)(1). However, 14.7 percent of 97/4 workers (n=29,535) were employed in firms in which the AWW increased by ten percent compared to 97Q3 and by ten percent compared to 96Q4. The AWW in these firms was $592 (see Table 2). The balance of workers (n=171,528) earned an AWW of $474 (see Table 3).

Growth in the AWW and total payroll are usually considered a bid in the labor market for additional human resources and are an indication that workers have more money to spend (or save, settle debts and pay taxes). However, an analysis of the distribution of earnings growth among firms in 97Q4 suggests that there are clearly situations in which growth in the AWW should not be interpreted as a market bid for more labor, nor should we anticipate that consumption growth will match growth in total payroll.

From 97Q3 to 97Q4, the total payroll grew by $63,663,750 among 13,003 UI accounts that were also active (i.e, paid wages) in 96Q4 and 97Q3. These matched firms (UI accounts) were defined as High Increase in Pay (HIP) firms if the AWW in the firm increased by ten percent or more from 97Q3 to 97Q4, and by ten percent or more from 96Q4 to 97Q4 (see Table 2 and Table 4, page 8).

Time and resources permitting, a statistical process should be used to determine whether or not large wage rates and payroll increases fail to solicit additional labor and greater spending. In the absence of both, and for illustrative purposes, it was determined to adopt ten percent growth over-the-quarter and over-the-year criteria to identify the proportion of payroll growth unlikely to result in additional employment growth or economic activity. The findings from these calculations are identified in Table 2 and Table 4.

Table 2 indicates that there were 2,882 HIP firms in 97Q4. The payroll in these firms increased by a net $35.1 million and accounted for 55.1 percent of the $63.7 million third to fourth quarter payroll change. As can be seen in Table 3, the total payroll increased by $28.6 million in the remaining 10,121 firms.

HIP firms were proportionally more likely to be found in the Construction industry (14.3% in Table 2 compared to 11.5% in Table 3), slightly more likely to be found in the Services industry (35% compared to 33.4%), and slightly less likely to be found in the Retail Trade industry (18.7% compared to 20.7%). Since HIP firms are not distributed across all industries in proportion to the distribution of all firms across all industries, it may be that there are characteristics other than "industry" (and seasonal behavior which has strong effects on fourth quarter employment and earnings) influencing the way firms use labor that warrant further study(2).

However, a high increase in a firm’s average wage by itself seems to be an insufficient criterion to adopt in defining wage growth as marginal to the market. Even substantial wage growth in firms where earnings are extremely modest probably results in immediate spending by workers with little impact on aggregate consumption, and represents such a weak market signal as to be thought of as hardly a bid at all. Table 4 organizes the HIP firms in terms of the level of change in the average wage. For 700 firms, the average level of change expressed as a rate was greater than or equal to ten percent both over the quarter and over the year. However, expressed in numeric terms, the average wage grew by $49 or less (hardly a bid in the labor market).

As seen in Table 4, (n=462) of the HIP firms saw a payroll increase of $25,607,157 or an increase per employee of $8,692 from the third quarter to the fourth quarter. Employees for which the average wage increased by $300 or more earned an AWW in 97Q4 of $1,439. It seems improbable that workers could successfully sustain spending or engage in consumption at the rate of $17,268 for the final three months of 1997. While a substantial increase in the average wage could arguably be considered a strong bid in the labor market (and both the question and answer should be empirical rather than demonstrative), there is no corroborating statistical evidence to support the notion that the demand for labor in these firms is on the rise. In fact, whether viewed from an industrial perspective (see Table 2), or from a level of growth in the average wage (see Table 4), employment in HIP firms fell from 97Q3 to 97Q4. Either an increase in pay of $8,692 over current earnings is an inefficient labor market signal or bid, or the payroll is expanding for other reasons.

As was mentioned earlier, selecting the appropriate divisor among HIP firms in determining which level of pay represents a true bid in the labor market for more labor, and also represents a level of pay that results in near immediate consumption, should be done empirically. For the moment, and for illustrative purposes, HIP firms have been divided into those that paid at or above the average wage for the fourth quarter of 1997 (see Table 5) and those firms in which the average wage falls below that level (see Table 6). Table 5 shows that 1,198 HIP firms paid the AWW of $461 or more in the fourth quarter. The fourth quarter payroll increased by $38.1 million among a mere 9.2 percent of all matched firms. Because these firms already paid salaries near the average level for the state, it appears likely that the majority of the payroll increase in the 97Q4 represented neither a bid in the market nor resulted in a more than marginal impact on consumption.

The fourth quarter is traditionally a period of seasonal contraction in the labor market. Despite the fact that the AWW increased substantially in some firms, that increase was mathematically a function of employment declining more rapidly than payroll. The net effect of rapid employment decline is illustrated in Table 6. These firms became HIP firms because their AWW increased even though the total payroll declined from 97Q3 to 97Q4(3). Firms in the Retail Trade industry are more highly represented among employment declining HIP firms (26.6% of all firms in Table 6 compared to only 7.5% in Table 5, and 20.3% in the universe as a whole) than other firms, while Services is slightly overrepresented in this same category. Once again, there may be a characteristic common to these firms that is trans-industrial.

In summary, an examination of firm behavior in the 97Q4, clearly indicates that the total payroll and average wage does not change evenly across all industries. In the current example, more than half of of the earnings growth from 97Q3 to 97Q4 is concentrated in the payrolls of less than ten percent of all matched firms. This finding serves as a challenge to the unquestioned use of the average wage and total payroll in labor market, consumption analysis, and employment and training program applications. Since the state Labor Market Information (LMI) offices are the only entities with access to firm-specific data, and an understanding of firm-specific behavior over time, this finding is also a challenge to the analytical agenda of state LMI offices.

Most employment opportunities in Wyoming are covered by UI. Indeed the UI covered payroll is the single largest component of the U.S. Commerce Department’s personal income series(4). For this reason, the covered payroll is a key economic indicator used to explain the ebb and flow of subsequent events such as state and local sales tax collections(5). Moreover, the average covered wage (the UI covered payroll divided by UI covered jobs) is used throughout the administration of programs relating to the labor market. The UI and Worker’s Compensation programs use the average wage to set program benefit levels, and the Job Training Partnership Act (JTPA) uses the average wage to set performance standards for its clients in the form of earnings placement measures. Although the use of the covered payroll and the average wage is ubiquitous in state and federal statistical systems and program operations, the measure has received little critical examination.

Federal and state applications of total payroll and the average wage to statistical, policy and program purposes is predicated on the assumption that earnings represent a fairly straightforward measure of the market value of work and the potential for worker consumption. Quarterly UI employer tax records are edited for consistency. This process frequently brings to light surges in an employer’s payroll, employment or both that are "unusual" from the standpoint of the employer’s past employment history, or the history of the industry of which the employer is a part. This paper demonstrates that the data files comprised of employer-specific records are a rich arena requiring further analysis.

Tom Gallagher is the Manager of Research & Planning.

1 Last month, Wyoming Labor Force Trends reported on UI covered employment and earnings for 96Q4 and 97Q4. That report included tabular data from all firms covered by unemployment insurance. In contrast, the present discussion focuses only on those firms that were active in all three quarters: 96Q4, 97Q3 and 97Q4.

2 Further study certainly seems justified. First, identifying firms in terms of some desired characteristic e.g. "High Pay, stable work and low turn over, or steady growth" prior to modeling their behavior--regardless of industry--may be a more efficient way of forecasting good jobs or those jobs that program development (e.g., JTPA) may find of greatest use. Second, only those state LMI offices capable of developing extra industry variables for describing, statistically grouping, and modeling firm behavior will have the capacity to forecast or project employment during the time series break created by the replacement of the Standard Industrial Classification (SIC) system by the North American Industrial Classification System (NAICS). Indeed, because of confidentiality, only state LMI offices have the capacity to create extra-industry classification systems using the firm as the unit of analysis for statistical modeling purposes. The time series break created by NAICS should be the "golden age" of employment modeling for LMI shops since no one else will have the capacity to do scientific forecasting.

3 Nancy Boyle, "First Quarter 1992 Covered Employment and Payrolls Released," Trends, December 1992, p.1.

4 Nancy Brennan and Gayle C. Edlin, "Regional Covered Employment and Wage Data: An Economic Indicator for Wyoming," Trends, January 1998, p.1.

5 David Black and Mike Evans, "Work, Pay and Consumer Spending, Parts One and Two," Trends, May 1997, p. 5 and June 1997, p. 8.

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