New
York State Education Department
The Calculation of A Regional Cost Index:
2006 Update
November, 2006
The Regional Cost Index was developed in recognition of the
geographic cost variations in different areas of
Professional Cost Index for by Labor Force Region (2006) |
||
Labor
Force Region |
Index
Value |
Purchasing
Power of $1,000 by Region |
Capital Distict |
1.124 |
$889 |
Southern Tier |
1.045 |
$956 |
|
1.091 |
$917 |
|
1.314 |
$761 |
Long Island/NYC |
1.425 |
$702 |
|
1.141 |
$876 |
|
1.103 |
$906 |
|
1.000 |
$1,000 |
|
1.000 |
$1,000 |
In order to
adjust for geographic variations in the cost of educational resources, the regional
cost index (RCI) was generated following a methodology similar to one developed
by Rothstein and Smith[1]
for the state of
Due to
insufficient wage information, the previous RCI was based on 63 of the 94
occupational titles used in the
The data on which the RCI is based was made available through the New York State Department of Labor. Since the original edition of the RCI, the structure of the occupational title system has been revised. This has resulted in the expansion of a number of titles. However, due to a lack of employment data, a fair amount of the titles were eliminated. In the end, 50 titles had both employment and wage data, seven were plugged with wage data, and an additional 2 employment titles were plugged where data was available statewide and for nine of the ten labor force regions. In all, 59 occupational titles were used for this analysis.
The first step in generating a regional cost adjustment from the list of 59 titles was to establish a statewide median wage figure for which median wages in each labor force region could be compared for indexing purposes. The statewide median wage was calculated by taking the total number of employees in each of the 59 titles for the state as a whole (for example, the total number of people working in the title “pharmacist” across the state), and multiplying that amount by the median annual wage for that title (13,410 pharmacists * $86,841). This result was then summed for all titles, and then divided by the total number of employees in all 59 occupational titles (1,026,769). This produced a weighted annual median wage of $69,975 for the professional titles making up the index.
It was important to avoid the possibility that the index could be skewed due to compositional differences in the percentage distribution or mix of the individuals occupying the 59 selected titles. Therefore, if professional wages in the titles selected were found to be identical in two labor force regions, but 60 percent of the employees in region A occupied the 10 lowest salaries titles (vs. a 10 percent employee representation in these lower salary titles in region B), a simple summation of wages could lead to the erroneous conclusion that professional service costs were far higher in region A than in region B. In short, “apparent” cost differences would be due totally to differences in the title composition of the workforce, not to true wage differences in those titles.
This problem was avoided by weighting the wage for each title based on the relative importance of that title in the group of 59 titles statewide. Thus, in determining the regional differences in median wage, we assume that the “mix” of jobs in each region is the same as the “mix” in the state as a whole. These title weights were then applied to each region, therefore making the distribution or service “mix” of titles a constant across the state. For example, if sales managers made up 10% of the total number of employees statewide in the 59 titles, then a 0.10 compositional weighting was assigned to sales managers in every region. This title weighting procedure thus imputes to every labor force region precisely the same mix of employees across the 59 titles in every region.
Title weights were generated by dividing the statewide number of employees in a given title by the total number of employees in the 59 titles of the index. For example, the number of pharmacists statewide was 13,410, which was then divided by 1,026,769 (the total number of workers in the state in these 59 titles). This yielded a title weight of 0.0155. (Since this was performed for all the titles in the list, the sum of all title weightings equals one.)
Once the title weights were
determined, they were incorporated into the data set for each of the ten labor
force regions. The median annual wage
for each title was multiplied by the title weight. This result was summed for all 59 titles,
yielding a regional median wage. This
regional median was divided by the statewide weighted median professional
service wage to yield the final professional service wage index for each
region. These results were then normed on the
When median wage data were missing for a title in a given region, two alternatives were explored for “plugging” these holes. One method involved a simple substitution of the state median wage for a given title for the missing wage information in a particular labor force region. However, it was recognized that this method of wage attribution was biased “upward” (toward the median) in low cost areas of the State, and biased downward in high cost areas of the State. The alternative solution, which was selected, was based on the creation of a similar regional cost index, using a smaller set of occupational titles (those titles, in which data was not missing in any region of the State, n=46). The smaller index, in conjunction with the statewide median salary information for any occupational title that was lacking salary information in a specific region, was used to estimate the missing regional salary item.
While the list of professional
occupations used to create the RCI was based on the work of Rothstein and Smith
in
The data from the 2004
Occupational Employment Survey for
The Bureau of Labor Statistics develops its estimates through the use of an annual mail survey of about one-third of the establishments state- (and nation-) wide in occupational groups such as: business and financial operations; transportation and material moving; personal care and service; architecture and engineering; office and administrative support; and management.[4] The survey is repeated in a three-year cycle, whereas the cycle continues, data from the third of establishments surveyed in current years builds on previous years’ data, in a process called wage updating. This results in detailed and precise estimates of wage levels even in small job categories or geographic regions. In the fourth year, the survey cycle starts over.
Since wage data is built-up over a three-year period, the approximations of wages become increasingly accurate and most precise in the third year. This year’s index calculations are based on the most accurate data-year in the cycle, and thus inspire confidence that the results are a good representation of the variation in professional service costs around the state. The triennial nature of the data suggests that the RCI need only be updated in those years for which the most accurate data in the cycle are available.
It should be noted that the index results for
[1] This
methodology is described in Rothstein, R., & Smith (1997). Adjusting
[2] See U.S. Department of Labor, “Interarea Comparison of Compensation and Prices”, Report on the American Workforce, 1997, pp.69-97.
[3] United States Department of Labor’s Bureau of Labor Statistics Website. Technical Notes for 2001 OES Estimates. (http://www.stats.bls.gov/oes/2001/oes_tec.htm)
[4] Ibid