Economic Report of the President

eintroduce the problem of changing skill mix if the additional promotionsreflect an upgrading of skills.Nonunion firms that do not have pay scales could calculate theiraverage pay raise from the wages and hours of those workers whocontinued to work for the firm throughout the year. Such a measurewould not be affected by changes in the composition of the workforce, since the wage rates of former or new employees would notenter into the calculation. Because firms generally hire new workersat the bottom and retire or lose workers from the top, the averagepay raise for continuing workers will exceed the average pay raise forall workers in a firm with stable composition but high turnover.Therefore, measures for continuing workers must be adjusted toallow for promotions.MEASURING FRINGE BENEFITSA critical element in the measurement of pay increases is the treatmentof fringe benefits. The cost of a given package of fringe benefitscan increase for either of two reasons: because the package hasbecome more generous (the employer is buying more services for theemployees) or because the price of a given set of services has risen.For example, an employer who adds dental benefits onto the healthinsurance provided for employees would increase the cost of healthinsurance by improving the package of benefits. Health insurancepremiums might also rise for a given set of benefits simply becausemedical care in general becomes more expensive.Which increases in the costs of fringe benefits should the TIP includeas increases in compensation? One approach is to include allincreases in the cost of fringe benefits, both those that reflect higherprices for a fixed package as well as those that reflect improvementsin the package. This would treat each dollar paid in fringe benefitsexactly like a dollar paid in cash wages. Such an approach, however,would require extensive work to evaluate the cost of all benefits. Althoughdetermining the cost of fringe benefits purchased from otherorganizations, such as medical insurance, would be simple, determiningthe cost of other fringes, like unfunded pension benefits, wouldbe more difficult. Another drawback is that firms and workers mightobject to being ruled out of compliance for cost changes they couldnot control, such as the cost of employer health plans.An alternative treatment would be to exclude fringe benefits completelyfrom the calculation of a group's average pay raise. Thiswould involve the fewest administrative problems. It would, however,provide a strong incentive for firms to give all increases above thestandard in the form of fringes rather than cash, since the groupwould be in compliance as long as cash remuneration did not increaseby more than the standard. This would defeat the purpose of87