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Rounded Wage Data and the Wage Growth Tracker: An Update
In an earlier Policy Hub: Macroblog post, I noted that the US Census Bureau had announced that it planned to make changes to the Current Population Survey Public Use File (CPS PUF). Those changes, part of the Enhanced Disclosure Protection program, included the rounding of the reported wage data in a way that would have a dramatic impact on the usefulness of the Atlanta Fed's Wage Growth Tracker.
The Census Bureau subsequently revised its plans and has proposed a different rounding method described here, to be introduced in February 2023 . This Macroblog post looks at the new method's potential impact on the Wage Growth Tracker. It also considers another of the Census Bureau's other proposed changes to the CPS PUF.
So, for example, $19.99 an hour would become $20, whereas $19.95 an hour would be unchanged. Also, $999 a week would be rounded to $1,000, while $995 would be unchanged.
How much impact would this revised scheme have had on the Wage Growth Tracker if it had been used in the past? The following chart plots three versions of the Wage Growth Tracker time series. The blue line is the published Wage Growth Tracker using unrounded data. The gray line is the Tracker based on the original proposal and described in the earlier Macroblog post. The orange line is the Tracker based on the revised rounding rules. The following table summarizes the current proposed rounding rules:
The chart makes clear that the impact on the Wage Growth Tracker under the current proposed method for rounding is much smaller than the original proposal. While the revised method holds some impact, the basic time series properties of the historical Wage Growth Tracker remain largely intact. The largest difference between the Wage Growth Tracker based on the current proposal and the Tracker computed using unrounded wage data is 0.13 percentage points, the average difference is −0.002 percentage points, and the mean absolute difference is 0.03 percentage points.
No approach is perfect, though, and one quibble I have with the current proposal is that the rounding schemes for reported hourly and weekly wages are not very consistent. For example, for someone who usually works 40 hours a week (the most commonly reported workweek), rounding an hourly wage less than $20 to the nearest $0.05 should be the same as rounding a weekly wage less than $800 to the nearest $2. But the current proposal rounds a weekly wage less than $800 to the nearest $5 instead. For someone reporting a wage of between $20 and $39.99 an hour, the proposed rounding to the nearest $0.25 equates to rounding a 40-hour weekly wage between $800 and $1,599 to the nearest $10. However, the current proposal rounds a weekly wage between $800 and $1,000 to the nearest $5, and a weekly wage above $1000 to the nearest $25. Finally, for someone reporting an hourly wage of $40 or more, the proposed rounding to the nearest $0.50 equates to a 40-hour weekly wage of $1,600 or more rounded to the nearest $20. But the proposal rounds a weekly wage of $1,600 or more to the nearest $25.
The preceding analysis suggests that a more consistent method would be to round a weekly wage less than $800 to the nearest $2, a weekly wage between $800 and $1,599 to the nearest $10, and a weekly wage above $1,600 to the nearest $20.
This alternative rounding method reduces the impact on the Wage Growth Tracker series relative to the current proposal by about one-third. Specifically, the mean absolute difference between the unrounded Tracker series and the series based on the currently proposed rounding scheme is 0.03 percentage points, versus 0.02 percentage points using my alternative. The largest difference is 0.09 percentage points, and the average difference is 0.002 percentage points.
For the CPS PUF, the current proposal has another aspect relevant to the Wage Growth Tracker: the future computation of topcoded earnings data. Currently, a threshold hourly wage that varies with hours worked is used to determine if an hourly wage is topcoded. For weekly earnings the threshold is $2884.61 ($150,000 a year). However, these threshold values have not changed since 1998, and because of generally rising nominal wages over time this has led to the topcoding of more wage observations each year (see here for more discussion of this issue). The Wage Growth Tracker's calculations exclude topcoded wage values because their inclusion would be computed as zero wage change—artificially pulling median wage growth lower.
The current proposal would instead compute a dynamic topcode value that varies in a way that would result in the top-coding of only the highest 3 percent of earnings each month. Although that change means more observations to use to compute the Tracker, those observations will come from a part of the wage distribution that might exhibit quite distinct wage growth properties. For example, wage growth tends to be lower for people at the end of their careers than at the start, and if the highest wages are mostly from people with relatively low wage growth, median wage growth could be pulled lower. Unfortunately, without access to the historical wage data that are not topcoded, constructing a counterfactual to explore the impact of this proposed change is simply not possible. Perhaps someone at the Census Bureau will explore the impact this change has on the properties of the wage growth distribution.
The Census Bureau is seeking comments on the Enhanced Disclosure Protection proposals through July 15, 2022. If you have any suggestions on any aspect of the proposal, send an email to ADDP.CPS.PUF.List@census.gov. I will be sending them a copy of this post for their consideration.
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