Technical Note

The Calculation and Uses

of the Spendable Earnings Series*

UNTIL THE EXTENSION of Federal income tax liability to the majority of wage earners in 1943, the amount of weekly pay earned was a satisfactory measure of the amount available for spending. Prior to that time, the only uniform nationwide deduction from gross weekly pay had been the social security tax which became effective on January 1, 1937. With the rise in the average level of earnings over the past several years, the workers' "take home pay" has become significantly less than the amount earned because of payroll deductions for income and social security taxes.

To provide a measure of trend of spendable income, the Bureau of Labor Statistics has developed series of spendable weekly earningsaverage money earnings after deductions for Federal income and old-age, survivors and disability insurance (OASDI) taxes. Spendable weekly earnings of production workers in both mining and manufacturing, and construction workers in contract construction are calculated each month as a part of the Bureau's program on hours and earnings statistics. Since changes in consumer prices directly affect the purchasing power of the worker, the Bureau also computes spendable earnings in constant (1947-49) dollars. Conversion of the earnings into 1947-49 dollars indicates the approximate value of the goods and services which could have been purchased with current earnings at average prices for the 3 years 1947-49.

This note is intended to present a description of the uses, computation methods, and concept of the series, in order to help users of BLS earnings statistics make more effective and appropriate use of its data. It also presents the formulas used in deriving the series, so that readers may compute comparable figures for industrial groupings not published by the BLS. The formulas

reflect changes in both the income tax and social security laws since 1939, when the series begin.' The latest change occurred on January 1, 1959, when the social security tax deduction was again increased from 2.25 percent on the first $4,200 of gross annual earnings to 2.5 percent on the first $4,800. This deduction will, unless the law is changed, continue until the end of this year, when the rate is due to become 3 percent on the first $4,800. This rate and the taxable base are scheduled to be in effect through December 1962.

Spendable earnings are derived from gross earnings, which measure only regularly recurring payments to workers and therefore exclude irregular bonuses, retroactive pay, and employers' contributions for welfare benefits. In addition. the spendable earnings series do not take account of all deductions from pay but only of the most important personal taxes for which deductions are made at standard rates nationwide. Because of wide variations in tax laws, State and city income taxes and employee contributions for other State and local programs cannot be deducted from average earnings on a national basis. dividual States, however, could develop their own formulas for statewide deductions.) Payments for union dues, like taxes, also reduce the amounts received in pay envelopes but are not subtracted from gross earnings because deductions are not uniform. Group insurance premiums and other pay deductions for welfare programs are generally classified as consumption expenditures or personal savings and would not be deducted even if the necessary data were available.

(In

Since the amount of tax liability depends on the number of dependents supported by the worker and his marital status as well as on the level of

Prepared in the Division of Manpower and Employment Statistics, Bureau of Labor Statistics.

1 The manufacturing series starts with 1939, those for mining and construction with 1947.

? See Technical Note on Hours and Earnings in Nonagricultural Industries (in Monthly Labor Review, April 1954, pp. 427-431).

⚫his gross income, it would be somewhat unrealistic

to speak of an average amount of income tax per wage earner. It has seemed preferable to compute > the tax liability for 2 groups of income receivers, a single person with no dependents and a worker who is the sole support of an adult and 2 children. Income from the earnings of other family members and from such sources as rent, dividends, and pensions are excluded.

Method of Computation

To prepare the spendable earnings series with a minimum of effort, a short-cut computation method was devised. This is a substitute for the direct application to gross earnings of the appropriate deductions, exemptions, and rates shown on the instructions accompanying Federal income tax forms; it also provides a means of deducting simultaneously for the old-age and survivors insurance tax. Both deductions from weekly earnings are made in a single operation. The same short-cut method can be used to adjust the weekly earnings figures for other industries for which gross earnings data are prepared by the Bureau.

The formulas used for the worker with no dependents and the one with 3 dependents are shown for the years 1939 to 1962 in the accompanying table. To compute the spendable earnings for a given industry, the gross weekly earnings figure for that industry is substituted for X in the formula for the appropriate earnings interval and the indicated arithmetic operations are worked out.

Spendable earnings in 1947-49 dollars are computed by dividing the BLS Consumer Price Index into spendable earnings in current dollars. The CPI reflects changes in prices of goods and services usually bought by urban wage-earner and clericalworker families.

Derivation of the Formulas

The procedures followed in deriving spendable earnings in 1959 for a worker with three dependents will illustrate the derivation of formulas for computing the series. Substantially the same procedure is used in deriving the formulas for other dependency groups and for other years.

The deductions specified for Federal income and OASDI taxes are those expected to be in effect during 1959, barring legislative changes. For income taxes, the bases of the formulas are the normal and surtax rates and the personal exemptions stipulated on the In lividual Income Tax Return (Internal Revenue Form 1040), known as the "long" form. A standard deduction of 10 percent of gross income, covering such items as medical care, taxes, and contributions, is used. The Federal old-age and survivors insurance tax of 2.5 percent of the first $4,800 of gross annual earnings is also taken into account in the formulas.

Because a worker with 3 dependents is allowed a total exemption of $2,400 ($600 for himself and for each dependent) and a standard deduction of 10 percent of gross income, he does not pay income taxes until he has earned more than $2,666.67 per year, or the equivalent of $51.28 per week. Taking account of the 2.5-percent OASDI tax, spendable average weekly earnings for the worker whose income is $51.28 per week or less would therefore be equal to X-0.025X or 0.975X where X equals gross average weekly earnings.

Because the tax law allows married couples to split their income evenly for tax purposes, the married worker with 3 dependents is taxed at the lowest rate (20 percent combined normal and surtax) on the first $4,000 of net income subject to tax (gross income less exemptions and the standard 10-percent deduction). On a gross income basis, the limits are $2,666.68 and $7,111.11 a year, or $51.29 and $136.75 a week. If Y equals gross annual income and 0.1Y equals the 10-percent standard deduction, then 0.9Y$2,400 (for 4 exemptions) equals net income. subject to income tax. At the 20-percent income. tax rate applicable in this bracket, the annual income tax would be 0.2 (0.9Y-$2,400) or 0.18Y-$480. The weekly tax equivalent (the annual tax liability divided by 52) equals 0.18X$9.23, where X equals the gross weekly earnings.

Since the maximum annual amount of OASDI tax is $120, based on the first $4,800 of earnings, it is necessary to set up 2 formulas for workers with 3 dependents whose net income is subject to the 20-percent income tax rate. For workers in the first group, with gross annual income from $2,666.68 to $4,800, or $51.29 to $92.31 a week, the OASDI tax is 2.5 percent on total earnings

throughout the year, and the formula for spendable weekly earnings is X-(0.18X-$9.23)0.025X, or 0.795X+$9.23, where X equals gross average weekly earnings. For the group with gross annual incomes between $4,800.01 and $7,111.11, or $92.32 to $136.75 a week, the OASDI tax would be the maximum: $120 on an annual basis or $2.31 on a weekly basis, and the formula for spendable weekly earnings would be X(0.18X-$9.23)—$2.31, or 0.82X+$6.92.

Publication and Revisions

A monthly press release on spendable weekly earnings is issued on the same day the latest Consumer Price Index is released-about the 25th of each month-showing a preliminary figure for spendable earnings for the previous month in both current and 1947-49 dollars. Revised figures for that month are later presented in the monthly publication Employment and Earnings and in the Monthly Labor Review. (See table C-2 of each issue, which presents both current and historical data for manufacturing.) Two sets of revised data are published: The first is a revision of the preliminary figure based on additional sample reports received by the 20th of the following month; the second is a final figure based on the complete sample.

The final data are still subject to possible revision at the time of the annual adjustment of the BLS employment estimates to new benchmarks, since the employment estimates are used to weight the earnings data and the introduction of new benchmark levels may cause some redistribution of weights. In general, revisions of earnings averages caused by benchmark adjustments of the employment data are slight and relatively infrequent.

Uses and Limitations

The spendable earnings series, although lacking numerous refinements which would be necessary to make them precise tools, serve as a rough guide to the trend of "take home" pay and are therefore useful in union-management wage negotiations, in developing national wage policies, and in studying current economic trends. They furnish a measure of changes in the money amounts

Some of the limitations implied in the derivation of the spendable earnings series should be remembered by users. These data measure the spendable earnings of workers who earn the average gross weekly earnings, have the specified number of dependents, and take the standard deduction. They may not represent the average spendable earnings of all workers with the specified number of dependents, which might, because of individual variations in earnings, tax rates, and deductions, be substantially different from the spendable earnings series. Moreover, since the income-tax rate depends on the total annual income, it must be assumed, in computing the income-tax deduction from average weekly earnings for a particular month, that the annual earnings are 52 times the weekly earnings.

If the spendable earnings series deflated by the CPI are used to measure changes in the general welfare of workers, certain technical and economic considerations should be borne in mind. First, the CPI represents only the purchases of wageearner and clerical-worker families in urban areas, and is therefore not strictly appropriate for deflating the widely varying earnings of workers in all areas of the United States, rural as well as urban. Moreover, the CPI measures the price change from month to month for a standard list

The OASDI tax is actually deducted only on the first $4,800 earned, and for the higher income group is therefore not spread equally over the year as in the formula. The full 2.5-percent tax is deducted from total earnings each week until the maximum of $120 is reached, and no further OASDI deductions are made until the beginning of the next calendar year.