Working Paper

Composition-Adjusted Wage Growth: A Robust Measure from Microdata

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.

JEL Classification: J31; C21; C18;

https://doi.org/10.21033/wp-2025-14

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2025-07

Number: WP 2025-14