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LPI OUTPUTS

7.1 LPI outputs are published in Labour Price Index, Australia (cat. no. 6345.0), previously called Wage Cost Index, Australia (cat. no. 6345.0). The publication was renamed from September quarter 2004. The name change provided clearer links between the survey and the data produced, and also reflected the inclusion of non-wage outputs in the publication.

7.2 The first issue of the quarterly publication Wage Cost Index, Australia (cat. no. 6345.0) was released on 26 March 1998. This issue showed wage rate movements between September quarter and December quarter 1997. From this issue onwards, the wage price index, previously referred to as the wage cost index, has been published quarterly.

7.3 The non-wage and labour price indexes are only released in respect of financial years. These series are published in an expanded September quarter edition of the LPI publication.

7.4 Data for the non-wage and labour price indexes are only available for financial years from 2001-02 onwards. The first release of these series was in the September quarter 2004 issue of the LPI publication.

WAGE PRICE INDEXES

7.5 Four sets of wage price indexes are compiled:

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

7.7 Users have expressed interest in separate male and female indexes, usually with the intention of measuring wage parity for the genders. However, separate gender indexes are not available for a number of reasons. First, direct comparison between index numbers is not possible in the LPI. If separate indexes were created, comparisons could only be made in relation to the rate of change in male versus female pay and not the actual levels of pay. Second, the creation of gender indexes would require an unreasonable increase in sample size, significantly increasing provider load. Finally, gender is not considered to be an attribute of a job, but rather a characteristic of the job occupant.

7.8 Full-time and part-time sub-indexes are also not available, for similar reasons to those described above. Movements in pay rates per hour for full-time and part-time employees generally do not differ significantly.

NON-WAGE PRICE INDEXES

7.9 Four non-wage price indexes are constructed:

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

LABOUR PRICE INDEXES

7.11 A labour price index can be constructed by combining the individual wage and non-wage components. Two versions of the labour price index are produced and, like the non-wage price indexes, they are financial year indexes and were first compiled for 2001-02:

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

INTERPRETING INDEX NUMBERS

7.13 The LPI measures changes in the price of labour over time (i.e. between any two periods within the series). It does not enable comparisons to be made between relative wage levels between states/territories or industries or sectors or occupations. For example, the fact that the index number for any particular state is higher than that for another state in a specific quarter does not mean that wages in the first state are higher than in the second. Rather, it means that since the base year, wages in the first state have risen more than wages in the second.

7.14 The usefulness of the LPI stems from the fact that the index numbers for any two periods can be used to directly calculate the change in the LPI between the two periods. These movements can be compared across states/territories, sectors, industries, or occupations.

7.15 The published index numbers are 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.

INDEX MOVEMENTS

7.16 Movements in indexes from one period to another can be expressed either as changes in index points or as percentage changes. In the LPI publication (cat. no. 6345.0), 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.

Total hourly rates of pay excluding bonuses, Australia Index numbers

December quarter 2003 99.7
less December quarter 2002 96.1
Change in index points 3.6
Percentage change 3.6 / 96.1 x 100 = 3.7%

Total hourly rates of pay excluding bonuses, Australia Index numbers

September quarter 2002 95.4
plus December quarter 2002 96.1
plus March quarter 2003 97.0
plus June quarter 2003 97.6
Financial year 2002-03 386.1/4 = 96.5

SEASONALLY ADJUSTED INDEXES

7.20 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.

7.21 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 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 wage price indexes. The ABS does monitor the effects of any such change and will advise users of the reliability of the seasonally adjusted series during any transition period.

7.22 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. 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 previous quarter and for the same quarter in the preceding year as the current 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

7.23 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 PERIOD

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

RELIABILITY OF THE INDEXES

Sampling error

7.25 Since the index numbers of the LPI 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 relevant employee jobs in the labour market been included in the collection. The ABS has not published any estimates of sampling error for the LPI. While it is reasonably straightforward to calculate sampling errors for a level estimate such as the total number of employee jobs estimated via a sample survey, it is not so straightforward a process for the LPI which is a product of sampling and index methodologies.

Non-sampling error

7.26 Inaccuracies in the data may also occur because of imperfections in reporting by businesses or in processing by the ABS. Inaccuracies of this kind are referred to as non-sampling errors. Every effort has been made to reduce non-sampling error, for example:

• by careful design and testing of questionnaires and processing systems
• by providing instructions to businesses 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.

OTHER ABS DATA SERIES

Price indexes

7.28 The LPI is one group of indexes amongst a range of price indexes produced by the ABS. Like the LPI, the other price indexes aim to measure changes over time, but they specifically relate to the average price of goods and/or services for particular markets.

The Consumer Price Index (CPI)

7.29 The CPI (cat. no. 6401.01) measures quarterly changes in the price of a 'basket' of goods and services typically acquired by Australian households (specifically capital city households). The composition of the basket of goods and services is wide ranging and aims to cover a high proportion of the expenditures by in-scope households in the period.

7.30 To be included in the basket, goods and services must be representative of purchases made by the CPI target population and have prices that can be associated with and are identifiable with a specific commodity.

7.31 The composition and weighting pattern for the CPI are reviewed at approximately five-yearly intervals to take account of changes in household spending patterns. Information for these reviews is provided by the ABS Household Expenditure Survey and other sources.

7.32 Detailed information about the CPI can be found in Australian Consumer Price Index Concepts, Sources and Methods (cat. no. 6461.0), which is available on the ABS website (www.abs.gov.au).

Producer Price Indexes (PPIs)

7.33 The ABS produces a range of PPIs (cat. no. 6427.0) including a selection of economy-wide indexes and indexes relating to specific industries (selected manufacturing, construction, mining and service industries). In general terms a PPI can be described as an index designed to measure either the change in the price of goods and services as they leave the place of production, or as they enter the production process. Thus, producer price indexes can be constructed as either output measures or input measures. Output indexes measure changes in the prices of sales by a defined sector of the economy while input indexes measure changes in the prices of purchases by a particular economic sector.

CPI and PPI sampling

7.34 Both the CPI and PPI indexes use judgmental or purposive samples, where the sample is selected on the basis of the knowledge and judgement of staff compiling the index. Interviews with businesses, various market reports, international trade, retail trade, manufacturing data and other information also help to form the basis for the selection and ongoing maintenance of samples of respondents and items (specifications) for pricing.

Employer surveys

7.35 The ABS collects labour cost information in a number of surveys including the Survey of Average Weekly Earnings (AWE), the Employee Earnings and Hours survey (EEH) and the Survey of Employment and Earnings (SEE). These surveys are similar in methodology to LPI in terms of using probability sampling and that selections are made from the ABS Business Register. The scope of the three surveys is also similar to but slightly wider than that of LPI. The LPI has more restrictions on scope mainly due to the longitudinal nature of the survey associated with the aim of measuring changes in wages paid.

7.36 More detailed information about these and other related employer surveys can be found on the ABS website in Labour Statistics Concepts, Sources and Methods (cat. no. 6102.0.55.001) and Australian Labour Market Statistics (cat. no. 6105.0).

Survey of Average Weekly Earnings (AWE)

7.37 The purpose of the survey is to measure average gross weekly earnings associated with employee jobs in Australia. Estimates of average weekly earnings, and changes in average weekly earnings, are produced each quarter. Estimates are used in commercial contracts, and in Commonwealth, State and Territory legislation. The quarterly measure of change in average earnings levels is often used as an indicator of change in underlying wage rates, for economic policy analysis. However, the ABS considers the LPI to be the preferred indicator of changes in wage rates as AWE estimates are affected by changes in the both the price of labour and changes in the composition of the labour market. Changes in the composition of the labour market include:

• variations in the proportion of full-time, part-time, casual, and junior employees
• variations in the proportion of male and female employees
• variations in the occupational distribution within and across industries (including changes in the proportion of higher and lower paid jobs);
• changes in average skill levels within occupations
• variations in the distribution of employment between industries.

• Average weekly total earnings (comprising ordinary time earnings plus overtime) for full-time adult employee jobs
• Average weekly total earnings for all employee jobs
• Average weekly ordinary time earnings for full-time adult employee jobs (commonly referred to as AWOTE).

The Employee Earnings and Hours survey (EEH)

7.40 EEH has been conducted since 1974. It is currently conducted biennially. The survey produces estimates of the composition and distribution of employee earnings and hours, as well as estimates of the proportion of employees whose pay is set by awards, by collective agreements and by individual agreements. Estimates from the survey are used in developing and reviewing wages and labour market policies, in the wage negotiating process, and in research into various aspects of the labour market.

7.41 Estimates are published initially in Employee Earnings and Hours, Australia, Preliminary (cat. no. 6305.0, with 2004 data being published electronically, in cat. no. 6305.0.55.001) and later in the more detailed publication Employee Earnings and Hours, Australia (cat. no. 6306.0).

7.42 Detailed information is obtained about a sample of employees from each selected business using a mail-out/mail-back collection methodology.

7.43 Like LPI, the sample of employees is obtained using a stratified two stage selection approach which involves first, the ABS selecting a sample of businesses from the ABS Business Register and second, each selected business selecting a sample of employees from their payroll(s).

Survey of Employment and Earnings

7.44 The Survey of Employment and Earnings (SEE) has been conducted on a quarterly basis since 1983. The purpose of the survey is to measure both the number of public sector wage and salary earners employed in the middle month of each quarter, and their total gross quarterly earnings. Prior to March quarter 2002 the SEE have been collected these data for the private sector. From March quarter 2002 private sector data are collected in the Quarterly Business Indicators Survey and are published in Business Indicators, Australia (cat. no. 5676.0).

7.45 Data from SEE are available in Wage and Salary Earners, Public Sector, Australia (cat. no. 6248.0.55.001).