Labor Costs Account for Over Two-Thirds of U.S. Business R&D Performance in 2020

In a span of 10 years, business R&D performance in the United States increased 93% in current dollars, from $279 billion in 2010 to $538 billion in 2020 (63% increase in constant dollars).^{​Change in constant dollars based on the Bureau of Economic Analysis’s gross domestic product (GDP) deflator (2012 = 100) in the National Income and Product Accounts (NIPA) table​ 1.1.9. Implicit Price Deflators for GDP. Accessed 2 August 2022 from https://apps.bea.gov/iTable/index_nipa.cfm.Change in constant dollars based on the Bureau of Economic Analysis’s gross domestic product (GDP) deflator (2012 = 100) in the National Income and Product Accounts (NIPA) table​ 1.1.9. Implicit Price Deflators for GDP. Accessed 2 August 2022 from https://apps.bea.gov/iTable/index_nipa.cfm.} During this period of rapid growth, the share of labor costs in domestic business R&D performance changed relatively little (table 1). Examining detailed labor cost categories (salaries, wages, and fringe benefits; stock-based compensation; and temporary staffing costs) reveals larger relative changes over this period.^{​In addition to labor costs, expenditures for R&D performance include materials and supplies; depreciation and amortization on R&D property, plant, equipment, and intangible assets; royalties and licensing fees; expensed equipment (not capitalized); and non-R&D services.In addition to labor costs, expenditures for R&D performance include materials and supplies; depreciation and amortization on R&D property, plant, equipment, and intangible assets; royalties and licensing fees; expensed equipment (not capitalized); and non-R&D services.} In particular, the share of R&D performance for stock-based compensation tripled from 3% in 2010 to 9% in 2020. Stock-based compensation typically takes the form of stock options or restricted stock issued to employees, and generally accepted accounting principles (GAAP) require U.S. businesses to expense the fair value of this compensation.^{​Federal Accounting Standards Board (FASB) reporting standard for companies to expense the fair value of stock options granted to employees came into effect in 2004.Federal Accounting Standards Board (FASB) reporting standard for companies to expense the fair value of stock options granted to employees came into effect in 2004.}

Across all industries, R&D relies on the creative input of skilled and often highly educated workers, but labor costs as a share of total R&D performance varies among the industries tracked by BERD. Labor costs account for half or more of the R&D performed in the United States for all but a few industries.^{​These industries together account for less than 1% of all business R&D performed in the United States.These industries together account for less than 1% of all business R&D performed in the United States.} Among the larger industries in terms of R&D performance, pharmaceuticals and medicines manufacturing (North American Industry Classification System [NAICS] code 3254) is relatively less labor-intensive (56%), as defined as labor cost share of R&D expenditures. By contrast, over 80% of the information sector’s (NAICS 51) R&D performance is for labor costs. Looking at the components of labor costs, the information sector is also notable for the share of its R&D performance that is attributed to stock-based compensation (18.0%), which is nearly three times the average for all other industries (6.1%) (figure 1).

R&D performing businesses located in the United States employed 22.0 million workers in 2020, of which 1.9 million were classified as R&D employees.^{​See table 4 in Wolfe R; National Center for Science and Engineering Statistics (NCSES). 2022. Businesses Spent Over a Half Trillion Dollars for R&D Performance in the United States During 2020, a 9.1% Increase Over 2019. NSF 22-343. Alexandria, VA: National Science Foundation. Available at http://ncses.nsf.gov/pubs/nsf22343. R&D employees include researchers, R&D managers, technicians, clerical staff, and others assigned to R&D groups.See table 4 in Wolfe R; National Center for Science and Engineering Statistics (NCSES). 2022. Businesses Spent Over a Half Trillion Dollars for R&D Performance in the United States During 2020, a 9.1% Increase Over 2019. NSF 22-343. Alexandria, VA: National Science Foundation. Available at http://ncses.nsf.gov/pubs/nsf22343. R&D employees include researchers, R&D managers, technicians, clerical staff, and others assigned to R&D groups.} As part of their expenditures for R&D, businesses spent $300 billion in compensation in the form of salaries, wages, and fringe benefits. Using these estimates, the average annual compensation of business R&D employees in 2020 was $155,000 in salaries, wages, and fringe benefits (figure 2).^{​By way of comparison, the U.S. average private industry worker’s total compensation (wages and benefits) was $72,000 in 2020 based on data from Bureau of Labor Statistics (BLS) National Compensation Survey (https://beta.bls.gov/dataViewer/view/timeseries/CMU2010000000000D). This estimate was calculated by multiplying the average 2020 hourly compensation by 2,000 hours.By way of comparison, the U.S. average private industry worker’s total compensation (wages and benefits) was $72,000 in 2020 based on data from Bureau of Labor Statistics (BLS) National Compensation Survey (https://beta.bls.gov/dataViewer/view/timeseries/CMU2010000000000D). This estimate was calculated by multiplying the average 2020 hourly compensation by 2,000 hours.} This figure grew 31% in current dollars between 2010 and 2020 (11% increase in constant dollars).

Large differences in compensation per R&D employee are evident across industries. In the chemicals manufacturing industry (which includes pharmaceuticals and medicines) the average salaries, wages, and fringe benefits per R&D employee was $230,000 in 2020, compared with $163,000 in the transportation equipment manufacturing industry (NAICS 336) and $107,000 in the professional, scientific, and technical services industry (NAICS 54) (which includes scientific research and development services) (figure 3). The average compensation per R&D employee in an industry may be associated with many factors, such as the R&D labor composition—for example, by occupation or R&D function (e.g., researchers or technicians)—and level of education.^{​For an examination of PhD researchers, see Moris F; National Center for Science and Engineering Statistics (NCSES). 2019. PhD Researchers in the Business Sector: Domestic and Foreign Employment and Industry-Level Characteristics of Domestic R&D. NSF 19-320. Alexandria, VA: National Science Foundation. Available at https://www.nsf.gov/statistics/2019/nsf19320/.For an examination of PhD researchers, see Moris F; National Center for Science and Engineering Statistics (NCSES). 2019. PhD Researchers in the Business Sector: Domestic and Foreign Employment and Industry-Level Characteristics of Domestic R&D. NSF 19-320. Alexandria, VA: National Science Foundation. Available at https://www.nsf.gov/statistics/2019/nsf19320/.} Figure 4 shows a scatter plot of salaries, wages, and fringe benefits per R&D employee and the share of researchers in R&D employment, illustrating that industries with higher shares of researchers (in contrast to other types of R&D employment) tend to have higher shares of compensation in the form of salaries, wages, and fringe benefits.^{​A scatter plot illustrating positive association or co-movement between two variables does not imply causation. For example, changes in both variables may be caused by a third variable not shown in the figure.A scatter plot illustrating positive association or co-movement between two variables does not imply causation. For example, changes in both variables may be caused by a third variable not shown in the figure.}

A company is defined in BERD as a business organization located in the United States, either U.S. owned or a U.S. affiliate of a foreign parent company, of one or more establishments under common ownership or control.

BERD samples are selected to represent all for-profit, nonfarm companies that were publicly or privately held, had 10 or more employees in the United States, and performed or funded R&D either domestically or abroad. Industry classification of businesses in BERD was based on the dominant business activity for domestic R&D performance, where available. For reporting units that did not report business activity codes for R&D, the classification used for sampling was assigned.

Beginning in survey year 2018, companies that performed or funded less than $50,000 of R&D were excluded from tabulation. In prior years, companies that performed or funded any amount of R&D were tabulated. This change has affected the comparability of these estimates to those published in prior years.

Because the statistics from the survey are based on a sample, they are subject to both sampling and nonsampling errors. (See the “Technical Notes” section in the detailed statistical tables reports at https://www.nsf.gov/statistics/srvybrds/.)

Moris F and Shackelford B; National Center for Science and Engineering Statistics (NCSES). 2023. Labor Costs Account for Over Two-Thirds of U.S. Business R&D Performance in 2020. NSF 23-322. Alexandria, VA: National Science Foundation. Available at https://ncses.nsf.gov/pubs/nsf23322.

Francisco Moris
Senior Analyst
NCSES
E-mail: fmoris@nsf.gov

Brandon Shackelford
Twin Ravens Consulting, under contract to NCSES

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