Composition-Adjusted Wage Growth: A Robust Measure from Microdata

Bo E. Honore and Luojia Hu

No WP 2025-14, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: Wage growth is a key indicator of labor market conditions, but common measures often conflate individual wage changes with shifts in workforce composition. This paper develops a composition-adjusted measure of wage growth using nonparametric decomposition and program evaluation methods. The adjusted measure tracks unadjusted growth in stable periods but diverges during disruptions: during the Covid-19 pandemic, wage growth falls from 12% to 6% after adjustment. The method accommodates rich covariates, is robust to data quality issues such as rounding, heaping and top-coding, and enables distributional and subgroup analysis using micro data, offering more accurate views of underlying wage dynamics.

Keywords: Wage growth; Selection; Decomposition (search for similar items in EconPapers)
JEL-codes: C18 C21 J31 (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-inv and nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:101717

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DOI: 10.21033/wp-2025-14

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