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EXPLANATORY NOTES


INTRODUCTION

1 This publication contains indexes measuring changes in the price of labour in the Australian labour market.

2 The methodology used to construct the wage, non-wage and labour price indexes (LPI) is similar to that used for other price indexes such as the Consumer Price Index. In the LPI, index numbers are compiled using information collected from 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) and broad industry group. Wage price indexes for broad occupation groups are currently produced but are to be discontinued with the last data in the series relating to the September quarter 2008. For more detailed information on the methodology used in the construction of the LPI, refer to Labour Price Index: Concepts, Sources and Methods (cat. no. 6351.0.55.001).

PUBLISHED INDEXES

3 Four wage price indexes are constructed and published quarterly. These indexes were first compiled for the September quarter 1997, and cover:

• ordinary time hourly rates of pay excluding bonuses index
• ordinary time hourly rates of pay including bonuses index
• total hourly rates of pay excluding bonuses index
• total hourly rates of pay including bonuses index. In these indexes the term 'bonuses' refers to bonuses and commissions.

• annual and public holiday leave
• superannuation
• payroll tax
• workers' compensation.

• labour price index excluding bonuses
• labour price index including bonuses.

DESIGN OF THE INDEXES

BROAD DESCRIPTION

7 The wage, non-wage and labour price indexes measure changes over time in the price of labour unaffected by changes in the quality or quantity of work performed. A range of procedures have been developed to identify and measure quality and quantity changes and ensure that only pure price changes are reflected in the indexes.

8 Price-determining characteristics of the jobs are detailed in fixed pricing specifications and any changes in labour payments due to changes in the pricing specifications do not contribute to 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, etc.)
• changes in the location where the work is performed.

WAGE PRICE INDEXES

10 The ordinary time hourly rates of pay 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, changes in pay scales, enterprise and workplace agreements, minimum wage setting, individual contracts and informal arrangements.

11 These indexes are not affected by changes in:

• penalty payments for overtime, shifts, weekends and public holidays (which fluctuate depending on the number of hours paid at penalty rates)
• allowances (which fluctuate according to how much work is performed under special work conditions e.g. height, dirt, heat allowances)
• bonus payments (which may, or may not, relate to an individual’s work performance).
  These payments are specifically excluded when calculating ordinary time hourly wage and salary rates.

13 The total hourly rates of pay indexes that exclude bonuses are based on a weighted combination of ordinary time hourly wage and salary rates (described in paragraphs 10 and 11) and overtime hourly rates. As a result, the total hourly indexes reflect changes in both the ordinary time and overtime hourly rates. However, the effect of changes in the amount of overtime paid at each overtime rate is not shown in these indexes.

14 Only those indexes that exclude bonuses and commissions are pure price indexes because bonus and commission payments can reflect changes in the quality of work performed. No attempt is made to remove this quality element from the indexes that include bonuses and commissions.

15 A review of the treatment of bonuses and commissions resulted in methodological changes in the March quarter 2006. Details of these changes and the likely impact on the indexes that include bonuses and commissions can be found in each of the 2006 editions of this publication.

NON-WAGE PRICE INDEXES

16 The annual and public holiday leave index is calculated using both ordinary time hourly wage and salary rates, and the amount of annual and public holiday leave offered by employers. Pure price changes in either of these variables will reflect in the index. The index specifically prices leave entitlements and therefore will not show changes due to fluctuations in the actual amount of leave taken by job occupants.

17 The superannuation index is calculated using ordinary time hourly wage and salary rates, and the rate of superannuation that is paid by employers. Pure price changes in either of these variables will be reflected in the index. Superannuation payments equal to and above the legislated minimum specified in the Superannuation Guarantee Act 1992 are included in the index. Amounts that are salary sacrificed to superannuation are included in the wage price indexes and not the superannuation index.

18 The payroll tax and workers' compensation indexes are calculated differently to the other wage and non-wage indexes. As these costs are both levied at the employer level, the indexes are calculated using total payroll information rather than rates of pay data. The separate indexes are derived by applying either payroll tax rates/thresholds or workers' compensation premium rates to the total payroll data. The indexes reflect pure price changes in total payroll and either changes in the payroll tax rates/thresholds or workers' compensation premium rates.

19 Data quality concerns exist in relation to the workers' compensation premium rates for the ACT private sector. Until these concerns are resolved, these data will be imputed based on industry averages across Australia. Workers' compensation index numbers for the ACT private sector will not be published separately.

LABOUR PRICE INDEXES

20 Two labour price indexes (one including bonuses and one excluding them) are constructed from the individual wage and non-wage components. As with the wage price indexes, only the labour price index that excludes bonuses is a pure price index because bonuses tend to reflect, at least partly, changes in the quality of work performed.

SCOPE AND COVERAGE

21 The target population of employers for the LPI 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, or jobs where the remuneration is set in a foreign country).

DATA COLLECTION

24 Information for the wage price indexes 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. The survey reference date is the last pay period ending on or before the third Friday of the middle month of the quarter, except for bonuses which are collected in respect to those paid during the three month period ending on the third Friday of the middle month of the quarter. 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.

25 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 LPI continues to be relevant and representative over time. For these reasons, the employer sample is refreshed annually (for the December 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 are included in the sample.

26 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.

27 Annual leave and superannuation information is collected from the same job sample as that used to construct the wage price indexes. However, data are only collected annually as part of the June quarter LPI survey. Changes in the job sample due to factors such as the annual refreshing of the employer sample, together with the requirement of pricing the same jobs in successive years, reduces the number of matched jobs used to calculate the annual and public holiday leave index and the superannuation index compared with the matched jobs underlying the wage price indexes.

28 Information from administrative and other ABS data sources is used to construct the payroll tax and workers' compensation indexes, as well as the public holiday component of the annual and public holiday leave index.

WEIGHTING

29 In the LPI, as with other price indexes, expenditure weights are used to combine elementary aggregates into broader level indexes. These weights are derived from independent estimates of labour costs for each elementary aggregate. The estimates are sourced from the Major Labour Costs Survey, the Employee Earnings and Hours Survey and the Census of Population and Housing. The weights are updated for the December quarter each year to take account of changing employer expenditure patterns for labour among each segment of the labour market (elementary aggregates). They reflect changes in the distribution of the number of employee jobs among occupations, industries, states/territories and sectors, as well as changes in labour cost relativities. The expenditure weights were updated in March quarter 2007 to implement the change of sector for the Telstra Corporation. Appendix 1 shows the distribution of employers’ expenditure on wages and salaries, as of March quarter 2007.

30 To facilitate comparison of index numbers over time, the published indexes are not re-referenced (i.e. reset to 100.0) each time this re-weighting occurs. Instead, the series based on the old expenditure weights and that based on the new weights are linked via an arithmetic calculation, which is referred to as chaining. This provides a continuous series from the commencement of the index, while incorporating the updated expenditure weights.

INTERPRETATION OF INDEX NUMBERS

31 Index numbers in this publication measure changes in the price of labour between the commencement of the series and a later period. Index number levels cannot be compared across states/territories as they do not provide comparative information on the relative levels of labour costs. 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 the price of labour between the two periods. These movements can be compared across states/territories, sectors, industries, or occupations.

PERCENTAGE CHANGE AND ROUNDING

32 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 quarterly estimates are calculated from unrounded original indexes and then rounded to one decimal place.

INDEX MOVEMENTS

33 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 (i.e. changes 'through the year')
• movements between consecutive financial years.

Total hourly rates of pay excluding bonuses, All Sectors, Australia Index numbers, seasonally adjusted (see table 1)

September quarter 2007	115.2
less September quarter 2006	110.6
Change in index points	4.6
Percentage change	4.6/110.6 x 100 = 4.2%

Total hourly rates of pay excluding bonuses, Australia Index numbers (see table 2)

September quarter 2006	110.7
plus December quarter 2006	111.8
plus March quarter 2007	113.0
plus June quarter 2007	113.9
Financial year	2006-07 449.4/4 = 112.4

SEASONALLY ADJUSTED INDEXES

37 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.

38 The total hourly rates of pay excluding bonuses index is the only index of the LPI that is seasonally adjusted. Institutional effects largely drive the seasonality of this index. Important factors in determining this seasonality are the timing of effect of Australian workplace agreements and certified agreements, the length of these agreements, and the timing of significant wage hearings that impact on rates of pay. A significant institutional change in wage setting arrangements can affect the relative level (or trend) and seasonality of the index.

39 Prior to 2006, the Australian Industrial Relations Commission (AIRC) handed down annual Safety Net Review (SNR) decisions which set federal full-time minimum award rates. Since the commencement of the WPI, the SNR contributed to the relative level of the wage price index. Most of its impact on the wage price index was in the September and December quarters each year. This impact contributed to the level of seasonality for those quarters. As a result of industrial relations changes associated with WorkChoices, the AIRC ceased its annual SNR decisions and the setting of federal minimum wage rates has become the responsibility of the Australian Fair Pay Commission (AFPC). There was therefore no SNR decision in 2006.

40 The AFPC's first decision was handed down on 26 October 2006 with a date of effect of 1 December 2006. The impact on the wage price index of the first AFPC ruling was mainly in the March quarter of 2007. This has resulted in changes in the size and timing of wage increases reported. These changes have impacted on the seasonality of the wage price index.

41 To account for this, the ABS has applied both a trend and a seasonal break in compiling the seasonally adjusted estimates for the September quarter 2006.

42 It will take some time before the seasonality of the new wage setting mechanisms can be determined. Seasonally adjusted estimates may be revised more than is usual as additional observations become available.

CONCURRENT SEASONAL ANALYSIS

43 The LPI 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. 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

44 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).

45 The ABS has undertaken an assessment of the SNR contribution to the relative level (or trend) of the wage price index. Over the life of the wage price index, the SNR has had a cumulative contribution to the level of the index. This cumulative contribution terminated after June 2006. As a result, there has been a break in the WPI trend series. At present, there is insufficient data to produce reliable trend estimates and the trend series has been suspended from the September quarter 2006. The trend series will be re-established when sufficient data is available.

REFERENCE BASE PERIOD

46 The reference base period of an index series is that period for which the value of the index is set to 100.0. It 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 was used as the original reference base for the wage price indexes as it was the first quarter for which data was available.

47 With the introduction of the non-wage price indexes, all indexes are presented on a reference base of 2003-04.

REVISIONS TO INDEXES

48 Original index numbers will be released as final figures at the time they are first published. Revisions will only occur in exceptional circumstances. Trend and seasonally adjusted indexes for some quarters will be revised as extra quarters are included in the series analysed for seasonal influences (see paragraphs 37 to 45).

RELATED PUBLICATIONS

49 Users may also wish to refer to the following publications which are available free on the ABS website <https://www.abs.gov.au>:

Labour Price Index: Concepts, Sources and Methods, cat. no. 6351.0.55.001
Consumer Price Index, Australia, cat. no. 6401.0
House Price Indexes, Eight Capital Cities, cat. no. 6416.0
International Trade Price Indexes, Australia, cat. no. 6457.0
Producer Price Indexes, Australia, cat. no. 6427.0
Australian Consumer Price Index: Concepts, Sources and Methods, cat. no. 6461.0
Producer and International Trade Price Indexes: Concepts, Sources and Methods, cat no. 6429.0
Australian Labour Market Statistics, cat. no. 6105.0

ABS DATA AVAILABLE ON REQUEST

51 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 David Taylor on Perth (08) 9360 5151 or the National Information and Referral Service on 1300 135 070.