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Chapter 5. Non-wage Price Indexes
NON-WAGE PRICE INDEXES
5.1 Although a large proportion of the change in the price of labour services is accounted for by changes in wages and salaries, non-wage costs are of interest in their own right and as a means of more accurately measuring changes in the total price paid for labour services.
5.2 Four non-wage price indexes are constructed:
- annual and public holiday leave index
- superannuation index
- payroll tax index
- workers’ compensation index.
5.3 The methodology to derive a price for input into the construction of each of these four indexes is outlined in this chapter. The process of constructing the indexes is outlined in chapter 6.
ANNUAL AND PUBLIC HOLIDAY LEAVE INDEX
Annual leave
5.4 Entitlements to paid annual leave have been legislated for many years. With the exception of casual employees, who in general have no entitlement to annual leave, the minimum entitlement is four weeks, although this can vary depending on the jurisdiction. It is also possible that employers provide annual leave in excess of the minimum entitlement.
5.5 Annual leave data are directly collected from employers in the Labour Price Index survey for the June quarter each year. This survey collects the number of weeks of paid annual leave that the occupant of the selected job is entitled to receive. Note that it is not the actual amount of leave taken that is collected as this reflects employee choices regarding when they take their leave.
5.6 Leave loading is an additional payment sometimes associated with annual leave. It is a premium (e.g. 17.5%) that is added to the employee's wage and salary during hours of annual leave. Although the payment of leave loading is not as common as it once was, it is still paid in numerous industries and occupations. However, analysis has shown that leave loading has only a limited impact on changes in the price of annual leave. Additionally, the payment of leave loading as part of ordinary time gross earnings is becoming increasingly common. This 'rolling-in' of the leave loading payment is considered to be a substitute price change, and does not impact on the individual indexes of the LPI (see parapgraph 4.19). For these reasons, leave loading has been excluded from the annual and public holiday leave index.
5.7 A recent trend in paid annual leave has been the ability for employees to either sell or purchase additional annual leave. In the case of selling annual leave, an employee may elect to receive a lump sum in lieu of a specified leave entitlement. When purchasing annual leave, the employee forgoes the income they would have received if these 'purchased' hours had been worked. Both of these arrangements are driven by employee preference and are price neutral to the employer. For these reasons the LPI considers the paid leave entitlement prior to any 'cashed in' or 'purchased' amounts.
Public holiday leave
5.8 In addition to annual leave, paid leave can also be provided for public holidays proclaimed under state/territory legislation. The typical entitlement to paid public holiday leave is ten days per year, although this can vary depending on the state/territory, sector and industry. Again, most legislation provides casual employees with no minimum entitlement to paid public holiday leave.
5.9 The collection of public holiday data is complicated by the fact that the number of, and reasons for, public holidays vary significantly across states/territories, sector and industry. For this reason, data are obtained directly from state/territory public holiday declarations, rather than from survey providers. These declarations, available from various government websites, describe the public holidays provided in the various jurisdictions.
5.10 Rather than directly collecting data for each selected job, a per year amount of public holiday leave is allocated to each job based on the characteristics of that job (e.g. casual or non-casual) and the appropriate public holiday information. To do this, a number of assumptions are made, including that only non-casual jobs receive paid public holiday leave, and that these jobs provide labour services over Monday to Friday. As a result, no paid leave is provided for public holidays that fall on a Saturday or Sunday, unless an additional day is provided in lieu.
5.11 For example, ANZAC Day (April 25) is recognised as a public holiday by all states. However, in 2004 ANZAC Day fell on a Sunday. In Victoria the holiday was observed on the Sunday, while in New South Wales the public holiday was observed on the following Monday (April 26). In this situation, a Monday to Friday job in New South Wales would show no change in the amount of public holiday leave provided by an employer (as ANZAC Day fell on a Friday in 2003). However, the identical job in Victoria will show a fall in the amount of public holiday leave, as the employer provides paid leave for one less public holiday compared to the previous year.
5.12 To be consistent with the annual leave data collected, the amount of public holiday leave is converted to a weekly amount by dividing by five.
Price of annual and public holiday leave
5.13 The price of annual and public holiday leave reflects the amount paid per hour of labour service purchased. This is calculated for each job by dividing the total per year cost of annual and public holiday leave by the quantity of labour services purchased or 'paid hours worked' during that period.
TOTAL COST OF ANNUAL AND PUBLIC HOLIDAY LEAVE
(5.1)
where:
TCAPLi is the total cost of annual and public holiday leave for job i
WLi is the amount (weeks per year) of annual and public holiday leave for job i
StdHrsr is the weekly standard ordinary time hours for job i
HBsei is the ordinary time hourly rate of pay for job i.
5.14 For example, consider a job which is paid $18 per hour for 40 ordinary time hours per week. The job holder is entitled to 4 weeks of paid annual leave and 10 days (2 weeks) of public holiday leave. The total cost to the employer of these leave entitlements is:
PAID HOURS WORKED
5.15 Paid hours worked reflects the number of paid hours for which the occupant of the job provides labour services. It is equivalent to the standard hours worked in the job per week multiplied by the number of weeks worked in the year (i.e. 52 weeks less the amount of annual and public holiday leave).
(5.2)
where:
PHWi is the paid hours worked for job i.
5.16 Using our example job above, paid hours worked equals:
PRICE OF ANNUAL AND PUBLIC HOLIDAY LEAVE
(5.3)
where:
PLi is the price of annual and public holiday leave for job i.
For our example job:
5.17 The job level information above has been included for illustrative purposes only. The calculation of the price of annual and public holiday leave actually occurs at the Elementary Aggregate (EA) level. The price equation remains identical to that above, but the variables refer to a weighted average of all the jobs in the EA. The weights used take account of both the sampling weight and the weekly standard ordinary time hours for each job.
Price movements
5.18 Movements in the price of annual and public holiday leave will result from either actual changes in the weighted average price of ordinary time hourly rates of pay and/or the weighted average weeks of annual and public holiday leave. Other changes in these variables, such as those related to the characteristics of the individual job occupant, are removed.
Other types of paid leave
Sick Leave
5.19 Paid sick leave, like paid annual leave, is a legislated requirement. However, in the case of paid sick leave a business is not usually required to provide the full entitlement of sick leave. As a result, a job's entitlement to sick leave can not simply be used as the amount of sick leave provided by an employer.
5.20 Instead, it is necessary to estimate the quantity of paid sick leave which has been taken by an 'average' employee during the year. The notion of an 'average' employee is required to ensure that the LPI is pricing labour services to constant quality. It removes differences in the amount of sick leave provided due solely to the attributes of the job occupant.
5.21 Numerous attempts have been made to construct the annual quantity of sick leave taken by the 'average' job holder. These attempts have failed to generate data of sufficient quality. Therefore, although a legitimate part of total labour costs, paid sick leave is not included within the LPI.
Other Paid Leave
5.22 Other types of paid leave such as maternity/paternity leave and long service leave will not be included as part of the LPI. They are excluded due to the difficulty associated with linking them to one hour of labour service purchased, and the fact that they account for only a small portion of total labour cost.
SUPERANNUATION INDEX
5.23 Superannuation is one of the largest non-wage items to be considered in the LPI. The Superannuation Guarantee Act 1992 requires that employers provide a minimum amount of superannuation for their employees. This minimum amount is specified as a percentage of an employee's salary or earnings base. The percentage has gradually increased since 1992 and reached 9% in 2002. The legislation generally covers all employees who are paid $450 or more per month and are between 18 and 70 years of age, or who are under 18 years of age and working more than 30 hours per week.
Types of superannuation funds
5.24 For Accumulation (Defined Contribution) schemes all contributions are invested, with returns credited to the employee's account as interest. The retirement benefit paid to the employee consists of the account's balance, after tax and any fees have been deducted. The majority of employees in Australia are in schemes of this type.
5.25 Defined Benefit schemes pay a retirement benefit dependent on employee characteristics such as length of service, final salary and history of employee contributions. Some employers elect to make periodic contributions to avoid making large payments when employees retire (fully funded). Other employers, mainly public sector organisations, elect to pay their contributions as benefits fall due (unfunded). No attempt is made to account for the different funding arrangements. Instead a rate/percentage of superannuation that the employer pays is determined in relation to the full retirement benefit accruing to the job occupant as specified by the scheme.
Superannuation payments
5.26 There are many payments made in respect of superannuation. Some of these, along with their treatment in the superannuation index, are discussed below.
- Employer contributions are made to comply with the Superannuation Guarantee legislation. While this specifies the minimum amount an employer is required to pay, it does not prevent employers paying above this amount. Many agreements provide employees with superannuation above the legislated minimum. All payments made, whether equal to or above the legislated minimum, are included as part of the superannuation index.
- Employee contributions are payments made by employees in addition to those made by the employer. They include both pre-tax (salary sacrifice) and post-tax contributions. Both of these are already included as part of the wage price indexes and therefore are not included again as part of the superannuation index.
- Financial penalties paid by the employer for not meeting the legislated superannuation requirements are not included as part of the superannuation index.
Data collection
5.27 Superannuation data are directly collected from employers in the Labour Price Index survey for the June quarter each year. This survey collects the rate (percentage) of superannuation that the occupant of the selected job receives.
Price of superannuation
5.28 The per hour price of superannuation is determined by multiplying the rate of superannuation by the hourly price of wages and salaries. Additionally, as superannuation is also paid while a job occupant is on leave, the rate of superannuation is also applied to the price of annual and public holiday leave.
PRICE OF SUPERANNUATION
(5.4)
where:
PSi is the price of superannuation for job i
RSi is the rate of superannuation for job i
HBsei is the ordinary time hourly rate of pay for job i
PLi is the price of annual and public holiday leave for job i.
5.29 Continuing the example from annual and public holiday leave, and assuming a rate of superannuation of 9% of the ordinary time hourly rate of pay, the price of superannuation would be:
5.30 As was the case for the annual and public holiday leave index (see paragraph 5.17), the above calculations are actually performed using weighted averages at the elementary aggregate level.
Price movements
5.31 As is clear from the equation above, movements in the price of superannuation will result from actual changes in the weighted average rate of superannuation, the weighted average price of the ordinary time hourly rate of pay and/or the weighted average price of annual and public holiday leave. Quality changes in these variables, such as those related to the characteristics of the individual job occupant, are removed.
PAYROLL TAX INDEX
5.32 Payroll Tax is a levy imposed on employers in direct proportion to the size of their wage and salary bill (payroll). The administration of payroll tax is a state/territory responsibility. All states/territories essentially administer the same type of payroll tax scheme. That is, an employer pays a specified rate of taxation on all wages and salaries above a certain threshold.
5.33 With the exception of Queensland, all states/territories apply a specific rate of tax and a fixed dollar threshold. For Queensland, the threshold is reduced ('clawed-back') as the size of the payroll increases. The following table includes the thresholds and rates of each of the schemes for the 2003-04 financial year.
Table 5.1: 2003-04 Payroll Tax rates and thresholds |
|  |
| Threshold | Rate | |
| state/territory | $ per quarter | % | |
| |
| New South Wales | 150,000 | 6.00 | |
| Victoria | 137,500 | 5.25 | |
| Queensland | (a)212,500 | 4.75 | |
| South Australia | 126,000 | 5.67 | |
| Western Australia(b) | 187,500 | 6.00 | |
| Tasmania | 252,500 | 6.10 | |
| Northern Territory | 150,000 | 6.20 | |
| Australian Capital Territory | 312,500 | 6.85 | |
| |
| (a) Threshold is reduced by $1 for every $3 of wages and salaries over the threshold |
| (b) Prior to 2003-04, Western Australia operated a progressive payroll tax scheme with different tax rates applying to different portions of an employer's payroll. The scheme also reduced the size of the threshold as per the Queensland scheme. |
5.34 Some businesses that are related to each other may be considered a 'group' for payroll tax purposes. If this is the case, the payroll tax threshold is not able to be claimed by each employer in the group, but is instead applied to the total payroll of the group. As a result, an individual employer within the group, must pay payroll tax on a larger portion of their payroll than an otherwise identical employer.
5.35 The payments considered to be part of an employer's payroll for the purposes of payroll tax can vary between states/territories. However, in general it includes the following items: wages and salaries, bonuses, commissions, allowances, employer superannuation contributions, fringe benefits and directors' fees.
5.36 Specific employers are exempt from paying payroll tax. These include;
- religious institutions
- public hospitals
- non-profit hospitals
- non-profit, non government schools providing education at or below secondary level
- municipalities (excluding wages paid to employees engaged in certain prescribed activities)
- public benevolent institutions
- charitable bodies.
Pricing Payroll Tax
5.37 Payroll tax is not incurred with respect to a particular job but rather a group of labour services purchased by an employer. As a result, it is necessary to redefine the unit of labour services being priced from the job (used to price wages and salaries, annual and public holiday leave, and superannuation) to a group of jobs (employer's payroll). The price of payroll tax is calculated by applying the appropriate rates and thresholds to each employer's payroll.
(5.5)
where:
PPTi is the price of payroll tax for employer i
PRi is the payroll for employer i
Tholdi is the applicable payroll tax threshold for employer i
Ratei is the applicable payroll tax rate for employer i.
5.38 Consider a Victorian employer, with a quarterly payroll of $250,000. The price of payroll tax for this employer would be;
Price collection
5.39 Unlike wages, superannuation and annual leave, price data for payroll tax are not directly collected from survey providers. Instead the price is derived using a variety of ABS and non-ABS data sources. The payroll tax rate and threshold information is obtained from various State government websites. Employer payroll information is modelled using ABS data from the Labour Price Index survey and the Average Weekly Earnings survey.
Price movements
5.40 The price of payroll tax for each employer is adjusted to ensure that price comparisons are made on a constant quantity and quality basis. This adjustment removes quantity and quality influences such as changes in the number and experience of the staff employed. This ensures that the payroll tax price is determined using a consistent set of labour services.
WORKERS' COMPENSATION INDEX
5.41 When a job holder is injured at work, legislation requires the employer to provide rehabilitation and suitable compensation. Given this legal obligation, employers are required to purchase insurance against the large costs that can arise from this liability.
5.42 The operation of workers' compensation is determined by the jurisdictions within which an employer falls. The jurisdictions include the eight state/territories and the Australian Government. Each jurisdiction is responsible for setting the rules and regulations governing workers' compensation. In New South Wales, Victoria, South Australia and Western Australia the State Governments set the formula for workers' compensation insurance, with approved insurance companies actually providing the insurance. Queensland and Australian Government employees are covered by government managed schemes and private insurers are excluded from offering insurance. Tasmania, the Northern Territory, and the Australian Capital Territory operate privatised schemes where a number of approved companies are able to provide insurance.
5.43 The cost of workers' compensation insurance is determined in direct proportion to the size of an employer's payroll. However, when a job holder is injured, the workers’ compensation insurer will not always meet the full costs of compensation and rehabilitation. Often, the employer must pay an 'excess', which is generally expressed as a period of compensation and can range from the day of injury to the first two weeks. In certain jurisdictions employers are able to pay an increased workers' compensation premium to avoid the requirement to pay any excess. This is usually set at a certain percentage of the premium and is referred to as 'buy-out'.
5.44 The payments considered to be part of an employer's payroll for the purposes of workers' compensation vary between states/territories. However, in general it includes the following items: wages and salaries, bonuses, commissions, allowances, fringe benefits and directors' fees. Employer superannuation contributions are also included in New South Wales, Victoria, and South Australia.
Pricing workers' compensation
5.45 Like payroll tax, workers' compensation is not incurred with respect to a particular job but rather a group of labour services purchased by an employer. Again, it is necessary to consider the employer's payroll as the unit of labour service to be priced. The price is calculated by applying the appropriate workers' compensation rates to an employer's payroll and then adding an amount for any excess.
(5.6)
where:
PWCi is the price of workers' compensation for employer i
WCPremiumi is the workers' compensation premium for employer i.
PRICING WORKERS' COMPENSATION PREMIUM
(5.7)
where:
WCRatei is the the applicable workers' compensation premium rate for employer i
PRi is the payroll for employer i
BORi is the additional premium rate to buy-out excess liability
BOPi is the proportion of employers within the jurisdiction and industry that buy-out excess liability.
PRICING EXCESS
(5.8)
where:
NOIi is the number of injuries per employer by jurisdiction and industry
POEi is the excess period for the jurisdiction
AWEi is the average weekly earnings for the employees of employer i
EPi is the proportion of employers within the jurisdiction and industry that pay excess i.e. do not buy-out.
5.46 Consider an employer with the following details: quarterly payroll of $100,000 (AWE = $600), workers' compensation premium rate of 5%, buy-out rate of 12%, and excess period of two weeks. Also assume that for the jurisdiction and industry the employer is in, the proportion of employers that buy out is 20% (therefore the proportion that do not is 80%), and the number of injuries per employer is 0.7.
Price collection
5.47 Price data for workers' compensation are not directly collected from survey providers. Instead the price is derived using a variety of ABS and non-ABS data sources. Workers' compensation information is obtained from the various Workers' Compensation Authorities. Employer payroll information is modelled using ABS data from the Labour Price Index survey and the Average Weekly Earnings survey.
5.48 Certain employers can opt to self-insure against workers' compensation liability. That is, they choose to fully fund all compensation and rehabilitation expenses as a result of employee injuries. Before becoming a self-insuring employer, several conditions must be satisfied to gain approval from the relevant State or Territory authority. Developing an appropriate pricing model for the small number of employers that self insure would not only be difficult but would also have a negligible impact on the final index numbers. Instead, these employers have simply been priced as if they were non self-insurers.
Price movements
5.49 The workers' compensation premium for an employer is calculated using the base insurance rate for the jurisdiction and industry in which it operates. The base insurance rate is the average rate of premium that is required to cover the costs of all claims in a given industry (based on the claims history and risk associated with that industry). Therefore, the actual premium paid by an employer may differ from the base industry rate. This arises as insurers take into account other factors (e.g. claims history, workplace inspections) when determining the actual insurance rate an employer is charged. However, using the base insurance rate is considered to be more consistent with the notion of pricing to constant quality, as individual employer attributes are excluded.
5.50 Base insurance rates are not available for the Northern Territory. Instead, average industry premium rates, calculated from gross premiums and wages data are used as a substitute. Base insurance rates are unavailable for the Australian Capital Territory and there are also quality concerns about the average premium data. Until these concerns are resolved, the Australian Capital Territory data will be imputed based on industry averages across Australia.
5.51 The price of workers' compensation for each employer is adjusted to ensure that price comparisons are made on a constant quantity and quality basis. This adjustment removes quantity and quality influences, such as changes in the number and experience of the staff employed. This ensures that the workers' compensation price is determined using a consistent set of labour services.
5.52 Average injury incidence rates are updated as new data become available. However, it is considered that changes in these rates are outside the scope of a pure price index as they reflect a change in the quality of the employer or the labour services employed. When these rates are updated, constant quality is maintained by recalculating the base period price using the latest incidence rates data.
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