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INTRODUCTION

1 This publication contains indexes measuring quarterly changes in wage and salary costs for employee jobs. These indexes were compiled for the first time for the December quarter 1997 (with a reference base of September quarter 1997 = 100.0).

2 The methodology used to construct the component indexes of the Wage Cost Index (WCI) is similar to that used for other price indexes such as the Consumer Price Index. In the WCI, index numbers are compiled from hourly wage and salary rates of pay for a representative sample of employee jobs within a sample of employing organisations. Individual indexes are compiled for various combinations of state/territory, sector (private/public), broad industry group and broad occupation group. For more detailed information on the methodology used in the construction of the WCI, refer to Information Paper: Wage Cost Index, Australia, 2000 (cat. no. 6346.0).

PUBLISHED INDEXES

3 There are four sets of quarterly base-period weighted indexes in this publication, which together comprise the WCI:

• ordinary time hourly rates of pay - excluding bonuses
• ordinary time hourly rates of pay - including bonuses
• total hourly rates of pay - excluding bonuses
• total hourly rates of pay - including bonuses.

5 Every effort is made to price jobs in the sample to constant quality. Price determining characteristics of the jobs are detailed in fixed pricing specifications, and any changes in wage and salary payments due to changes in the pricing specifications are removed from index movements. The following are examples of changes in price determining characteristics which are not reflected in index movements:

• changes in the nature of work performed (e.g. different tasks or responsibilities)
• changes in the quantity of work performed (e.g. the number of hours worked)
• changes in the characteristics of the job occupant (e.g. age, apprenticeship year, successful completion of training or a qualification, grade or level, experience, length of service, fitness, etc.)
• changes in location where the work is performed.

7 The ordinary time indexes that exclude bonuses measure quarterly changes in ordinary time hourly wage and salary rates. Changes in rates of pay reflected in these indexes (i.e. pure price changes) arise from a range of sources including award variations, enterprise and workplace agreements, centralised wage fixation, individual contracts and informal arrangements.

8 These indexes are not affected by changes in penalty payments (which fluctuate depending on the number of hours paid at penalty rates), changes in allowances (which fluctuate according to how much work is performed under special work conditions e.g. height, dirt, heat allowances) or changes in bonus payments (which may, or may not, relate to an individual’s work performance). Specifically, the following costs are excluded when computing ordinary time hourly wage and salary rates:

• penalty payments for overtime, shifts, weekends and public holidays
• ordinary time and overtime allowances
• bonus payments.

10 The total hourly indexes that exclude bonuses are based on a weighted combination of ordinary time hourly rates (described in paragraphs 7, 8 and 9) and overtime hourly rates. The total hourly rates reflect changes in ordinary time hourly rates as well as changes in overtime hourly rates. The effect of changes in the amount of overtime paid at each overtime rate is not shown in these indexes except when overtime penalty payments are rolled into ordinary time hourly rates. When this occurs, the increase in the ordinary time hourly rate will tend to be offset by the elimination of the higher overtime hourly rate, leaving the total hourly indexes largely unchanged.

11 Only those indexes that exclude bonuses are pure price indexes. This is because bonus payments tend to reflect changes in the quality of work performed.

SCOPE AND COVERAGE

12 The target population of employers for the WCI is all employing organisations in Australia (private and public sectors) except:

• enterprises primarily engaged in agriculture, forestry or fishing
• private households employing staff
• foreign embassies, consulates, etc.

• Australian permanent defence force jobs
• non-salaried directors
• proprietors/partners of unincorporated businesses
• persons paid by commission only
• working proprietors/owner managers of Pty Ltd companies
• employees on workers’ compensation who are not paid through the payroll
• ‘non-maintainable’ jobs (i.e. jobs that are expected to be occupied for less than six months of a year)
• jobs for which wages and salaries are not determined by the Australian labour market (e.g. most employees of Community Development Employment Programs, jobs where the remuneration is set in a foreign country).

CHANGES TO THE ABS BUSINESS REGISTER

15 The introduction of The New Tax System had a number of significant implications for ABS business statistics, and these are discussed in the Information Papers: ABS Statistics And The New Tax System (cat. no. 1358.0) and Information Paper: Improvements in ABS Economic Statistics [Arising from the New Tax System] (cat.no. 1372.0). However, due to the methodology used to construct the WCI, these changes do not affect the index numbers or period-to-period movements.

DATA COLLECTION

16 Information for the WCI is collected each quarter by mail questionnaires from a sample survey of approximately 4,800 private and public sector employers selected from the ABS Business Register. In the first quarter they participate in the survey, each employer selects a sample of jobs from their workplace(s) using sampling instructions provided by the ABS, and provides information for these jobs, including detailed pricing specifications. In subsequent quarters they are asked to provide details of payments made to the current occupants of these same jobs. It is essential that the same jobs are priced in successive quarters, whether the individual job occupants are the same or not. Approximately 20,000 matched jobs are priced each quarter from the selected employers.

17 The sampling method retains the highest possible common sample of employers over time, and retains the same sampled jobs within those employers where possible. However, it is also necessary to ensure the WCI continues to be relevant and representative over time. For these reasons, the employer sample is refreshed annually (for the September quarter) in a way that ensures a high proportion of common selections while allowing new employers to be represented in the sample. Refreshing the sample also allows the ABS to control the length of time that small businesses in particular are included in the survey. The sample refresh coincides with updating of expenditure weights (see paragraph 19).

18 Between each annual refresh of the employer sample, a small number of employee jobs will be lost from the survey sample because of the closure of some businesses. In addition, some jobs in continuing businesses will be replaced in the sample because of restructuring and other job changes.

WEIGHTING

19 In the WCI, as with other price indexes, expenditure weights are used to combine elementary aggregate indexes into publication indexes. These weights are derived from independent estimates of total weekly wages and salaries for elementary aggregates. The independent estimates are sourced from the quarterly Survey of Employment and Earnings (SEE), the biennial Employee Earnings and Hours (EEH) survey and the five-yearly Census of Population and Housing. The weights are updated for the September quarter each year to take account of changing wage and salary expenditure patterns among the elementary aggregates. The first percentage changes that can be calculated using the updated weights will occur in respect of the December quarter each year. Updated expenditure weights reflect changes in the distribution of the number of employee jobs among occupations, industries, states/territories and sectors, as well as changes in wage rate relativities. The Appendix shows the distribution of employers’ expenditure on wages and salaries, for the September quarter 2003.

20 To facilitate comparison of index numbers over time, the published indexes will not be re-referenced (i.e. reset) to 100.0 each time this re-weighting occurs. This will provide a continuous series from the original reference base of September quarter 1997 = 100.0, while incorporating the updated expenditure weights.

PERCENTAGE CHANGE AND ROUNDING

21 The published index numbers have been rounded to one decimal place, and the percentage changes (also rounded to one decimal place) are calculated from the rounded index numbers. In some cases, this can result in the percentage change for the total level of a group of indexes being outside the range of the percentage changes for the component level indexes. Seasonally adjusted and trend estimates are calculated from unrounded original indexes and then rounded to one decimal place.

INTERPRETATION OF INDEX NUMBERS

22 Index numbers in this publication measure changes in hourly rates of pay between the reference base period (September quarter 1997 = 100.0) and a later period. Index number levels cannot be compared across states/territories as they do not provide comparative information on levels of hourly rates of pay. Similarly, index number levels cannot be compared across sectors, industries, or occupations. The usefulness of index numbers stems from the fact that index numbers for any two periods can be used to directly calculate the change or movement in hourly rates of pay between the two periods. These movements can be compared across states/territories, sectors, industries, or occupations.

INDEX MOVEMENTS

23 Index numbers in this publication are constructed on a quarterly basis with a reference base of September quarter 1997 = 100.0. Movements in indexes from one period to another can be expressed either as changes in index points or as percentage changes. In this publication, percentage changes are calculated to illustrate three different kinds of movements in indexes:

• movements between consecutive quarters
• movements between corresponding quarters of consecutive years
• movements between consecutive financial years.

March quarter 2004 123.7
less December quarter 2003 122.7
Change in index points 1.0
Percentage change 1.0/122.7 X 100 = 0.8%

September quarter 2002 117.4
plus December quarter 2002 118.3
plus March quarter 2003 119.4
plus June quarter 2003 120.1
Financial year 2002-03 475.2/4 = 118.8

SEASONALLY ADJUSTED INDEXES

BACKGROUND

27 The ABS released experimental seasonally adjusted estimates of the WCI in the April 2002 issue of Australian Economic Indicators (cat. no. 1350.0). At that time the seasonal analysis was based on a very short time series containing only 17 quarterly observations. However, because of user interest in the seasonally adjusted estimates, these experimental indexes were published in an appendix in the WCI publication each quarter from June 2002 to June 2003. The seasonally adjusted indexes published in that appendix were for total hourly rates of pay excluding bonuses for each of the private and public sectors and for all sectors. Now that a longer time series is available, the seasonal pattern can be derived with a greater degree of certainty and so the experimental label has been removed.

28 Seasonally adjusted and trend indexes are presented in Table 1. Time series data are available on the ABS website or by contacting Tim Landrigan (phone (08) 9360 5151 or e-mail <tim.landrigan@abs.gov.au>).

SEASONAL ADJUSTMENT

29 Seasonally adjusted estimates are derived by estimating and removing systematic calendar related effects from the original series. In most economic data these calendar related effects are a combination of the classical seasonal influences (e.g. the effect of the weather, social traditions or administrative practices) plus other kinds of calendar related variation, such as trading day, Easter or the proximity of significant days in the year (e.g. Christmas). In the seasonal adjustment process, both seasonal and other calendar related factors evolve over time to reflect changes in activity patterns. The seasonally adjusted estimates still reflect the sampling and non-sampling errors to which the original estimates are subject.

SEASONALLY ADJUSTED WCI

30 Institutional effects largely drive the seasonality of the WCI. Important factors in determining the seasonality of the WCI are the timing of effect of Australian workplace agreements and certified agreements, the length of these agreements, and the timing of significant centralised wage hearings that impact on award rates of pay such as the "Safety Net Review" conducted by the Australian Industrial Relations Commission. A significant future change in wage setting arrangements, such as that which occurred during the mid to late 1990s, could affect the seasonality of the WCI. The ABS does monitor the effects of any such change and will advise users of the reliability of the seasonally adjusted WCI estimates during any transition period.

CONCURRENT SEASONAL ANALYSIS

31 The WCI series uses a concurrent seasonal adjustment methodology to derive the adjustment factors. This method uses the original time series available at each reference period to estimate seasonal factors for the current and previous quarters. Concurrent seasonal adjustment is technically superior to the more traditional method of reanalysing seasonal patterns once each year because it uses all available data to fine tune the estimates of the seasonal component each quarter. With concurrent analysis, the seasonally adjusted series are subject to revision each quarter as the estimates of the seasonal factors are improved. It eliminates the need to use projected seasonal factors, and results in substantial gains in accuracy and consistency of the seasonally adjusted series. In most instances, the only noticeable revisions will be to the combined adjustment factors for the previous quarter and for the same quarter in the preceding year as the reference quarter (i.e. if the latest quarter is Q_t then the most significant revisions will be to Q_t-1 and Q_t-4).

TREND ESTIMATES

32 Trend is a measure of the underlying direction of a series. The ABS trend estimates are derived by applying a 7-term Henderson-weighted moving average to all quarters of the respective seasonally adjusted indexes except the first three and last three quarters. Trend estimates are created for these quarters by applying surrogates of the 7-term Henderson weighted moving average to the seasonally adjusted indexes, tailored to each time series. In general, trend estimates give a better indication of underlying behaviour than the seasonally adjusted estimates. Please refer to the ABS information paper, A Guide to Interpreting Time Series - Monitoring Trends (cat. no. 1349.0).

REFERENCE BASE

33 The reference base of an index series is most commonly a year but can also be a different length of time, ranging from two or three years down to a single quarter. It often coincides with the weighting base for the series, but this is not essential. The September quarter 1997 used as the base period for the original (i.e. non-seasonally adjusted) WCI series was chosen arbitrarily - it was the first quarter for which WCI data were available.

34 Seasonal adjustment is a statistical estimation process that is principally designed to help analysts identify the underlying movements in the series involved by removing the estimated seasonal patterns. The evolving seasonal patterns reflect the changes in activities. However, the relationship between the original and seasonally adjusted series is also useful in terms of indicating which quarters are 'seasonally high' and those which are 'seasonally low'. Therefore, it has been decided to show the seasonally adjusted series exactly as they have been derived from the original series and not to re-reference the seasonally adjusted data to 100.0 in September quarter 1997.

RELIABILITY OF THE INDEXES

35 Since the index numbers are based on information relating to a sample of employee jobs, they are subject to sampling error. That is, they may differ from figures that would have resulted had all the in-scope employee jobs in the labour market been included in the collection. Estimates of the magnitude of the sampling error of the index numbers will not be available until the WCI has been operating for a sufficient number of quarters to enable meaningful estimates to be calculated.

36 Inaccuracies in the data may also occur because of imperfections in reporting by respondents or in processing by the ABS. This kind of inaccuracy is referred to as non-sampling error. Every effort has been made to minimise non-sampling error, for example:

• by careful design and testing of questionnaires and processing systems
• by providing instructions to employers on how to select a sample of employee jobs
• by detailed checking of completed survey forms
• by instituting a range of procedures for ensuring that jobs are priced to constant quality.

RELATED PUBLICATIONS

38 Users may also wish to refer to the following publications which are available on request:

Australian Labour Market Statistics, cat. no. 6105.0
Average Weekly Earnings, Australia, cat. no. 6302.0
Consumer Price Index, Australia, cat. no. 6401.0
House Price Indexes: Eight Capital Cities, cat. no. 6416.0
Information Paper: Wage Cost Index, Australia, 2000, cat. no. 6346.0
International Trade Price Indexes, Australia, cat. no. 6457.0
Producer Price Indexes, Australia, cat. no. 6427.0

ABS DATA AVAILABLE ON REQUEST

40 As well as the statistics included in this and related publications, the ABS may have other relevant data available on request. Inquiries should be made to Tim Landrigan on Perth (08) 9360 5151 or the National Information and Referral Service on 1300 135 070.